YOUR MONEY: By Naomi Caine

Mervyn King, the governor of the Bank of England, has warned that inflation could rise sharply in the second half of the year, to above 4%. He also expects inflation to stay "markedly" above the 2% target until "well into 2009".

In a speech to City luminaries at the Mansion House dinner last week, King was pointedly downbeat. He said: "Rising fuel, gas, electricity and food prices mean that average real take-home pay will stagnate this year. It will not be an easy time, and I know that some families will find it particularly difficult."

The governor also emphasised that the Monetary Policy Committee would be prepared to take "whatever action is needed" to keep inflation under control, a strong hint that interest rate cuts are off the agenda. In fact, consumers might be well advised to brace themselves for a rate rise, especially after the recent strong retail spending figures.

Alistair Darling, the chancellor, was more upbeat. In his first speech to the annual dinner, he was at pains to point out that the current rate of inflation at 3.3% "remains low" compared to the 1970s, "when it reached over 26%". But Darling again called for pay restraint in both the private and public sectors.

The chancellor is right: inflation is low compared with the 1970s. But that doesn't anaesthetise families from the pain of rising prices. Inflation is running at an 11-year high of 3.3%, and could spike to above 4% in the next few months, double the government's official 2% target. Inflation is running even higher if you look at the Retail Prices Index (RPI), which includes the cost of housing. The RPI hit 4.3% last month, up from 4.2% in April. So what can you do to protect your money from the ravages of inflation?

SAVINGS
Savers are vulnerable to attack from the twin terrors of tax and inflation. So, if you have any spare cash to put aside, make sure you use up your tax-free Isa allowance before you look at ordinary accounts. You can put up to £7200 in an Isa in the current tax year, with up to a maximum £3600 in cash.

The top cash Isas include IceSave's Easy Access Isa at 6.1%, or you can earn 6.08% in the Barclays Bank Tax Haven Isa. If you want a fixed rate, Yorkshire Building Society is paying 6.3% fixed for one year in its Fixed Rate Anniversary Isa.

You can then look at ordinary savings accounts. But you must find an account that pays more than 5.5% if you are a higher-rate taxpayer, or more than 4.13% if you pay tax at the basic rate. If not, you are effectively losing money. And that's to beat tax and CPI. If you want to earn more than the RPI, you need 5.38% as a basic-rate taxpayer and 7.17% if you are in the top tax band.

It's a tough call, but FirstSave and Yorkshire Building Society offer fixed-rate bonds that pay just over 7%. Or you could look at regular savings accounts, such as Barclays Bank Monthly Savings at 7.49%.

Alternatively, there are a number of accounts that set out to beat inflation. Index-linked Savings Certificates from National Savings & Investments, for example, pay a return linked to RPI. You can invest a maximum of £15,000 in each of the three and five-year certificates and earn RPI plus 1%. The certificates are also tax-free, so the current interest rate of 5.3% represents a gross rate of just under 9% for a higher-rate taxpayer or about 6.6% for a basic rate payer.

Consider also the Leeds Building Society's Inflation Buster Bond, which pays RPI plus 2.5%. The interest is paid when the bond matures in July 2010, but the returns are taxable. However, the society also offers an Inflation Buster Isa that pays the same rate of interest.

Savers who are prepared to take more of a risk could think about investing in the stock market. Shares tend to outrun inflation over the long term, particularly if you take dividends into account.

PENSIONS
Inflation is your enemy if you are about to retire, because pensioners tend to lock into an annuity that pays a fixed income.

The obvious way to protect your pension income from inflation is to buy an index-linked annuity, which pays less in the early years than a level annuity but rises in line with inflation, usually RPI. In theory, an inflation-linked annuity is a good idea. But in practice the cost has shot through the roof, so they no longer look such good value for money.

If inflation sticks at about 4%, it would take 14 years for the annual payments from the inflation-linked annuity to overtake the annual income from the level annuity, and about 24 years to break even.

Tom McPhail of Hargreaves Lansdown, an independent financial adviser, says: "It's a tough choice for people who are about to retire. If they take out a level annuity, they are making some pretty heroic assumptions about their ability to cope with inflation in the future. On the other hand, it's hard to see that an inflation-linked annuity is good value. A compromise might be an escalating annuity, which rises each year by a fixed amount, say 3%. You are then buying at least some protection against inflation in your retirement."

For example, a 65-year-old man with a pension fund of £100,000 could buy a level annuity at £7768 a year. If he opted for an annuity linked to RPI, Houdini would get £4826 a year. But his fund would buy a 3% escalating annuity income of £5771.

MORTGAGES
When inflation is above target, interest rate rises cannot be ruled out, which is bad news for hard-pressed borrowers. Mortgage rates are already running at a 10-year high, making it almost impossible to get a fixed rate under 6%. The best advice is to snap up a good deal while you can. First Direct has a two-year fix at 5.49%, but you need a deposit of at least 20%. You need an even bigger deposit of 25% if you want to take up the Halifax offer of a three-year fix at 6.09%. Or there's a tracker from the Woolwich, pegged at 0.74 points above the base rate to give a current pay rate of 5.74% - but you need a deposit of at least 40%.

HOUSEHOLD BILLS
High inflation is putting the squeeze on family budgets. Ann Robinson, director of consumer policy at uSwitch.com, says: "Essential living costs have risen by an average of 7% from June 2007 to June 2008, but with salaries expected to increase by just 3.4% this year, households are witnessing a substantial deficit. We are working harder than ever before but we are not getting any richer."

Some experts predict that household energy bills could increase by as much as 40% this winter. So it makes sense to check whether you could get a better deal by switching your heating and lighting supplier. And the same goes for your mobile phone and broadband deals.