Bank of England chews over food prices in face of rising inflation

The humble potato and lowly carrot are the Bank of England's latest enemies in its fight against inflation.

Food and non-alcoholic drink prices have leapt by 6 per cent over the past 12 months, the fastest annual rate of increase for six years. Indeed, food is a key factor behind the recent rise in overall inflation, which is currently running at 2.8 per cent and well above the Bank's 2 per cent target.

It is the price of vegetables that has really soared with potatoes up by 16.5 per cent in the year to April, and fresh vegetables other than spuds rising by a massive 21.2 per cent. Other double-digit increases include fresh fish (12.8 per cent), eggs (14.4 per cent) and milk (10.4 per cent). While some increases can be dismissed as the consequence of the vagaries of the British weather, analysts say there are more deep-seated factors at work.

It is not just a UK phenomenon. Food prices worldwide have risen sharply as the expanding biofuels industry, climate change and the growing prosperity of countries such as India and China push up the costs of farm commodities including wheat, corn, milk and oils. Some experts have predicted that retail food prices are heading for their biggest annual increase for 30 years.

"Policymakers have to keep a very close eye on this," said Philip Shaw, chief economist at Investec. "Food prices tend to be volatile over the short-term but the growing popularity of biofuels [environmentally friendly ethanol is made from sugar or corn] and climate change mean they are likely to continue trending higher over the medium term."

Particularly worrying for the Monetary Policy Committee is the fact that food is shooting up at a time when world energy prices are stirring again. London-traded Brent crude oil last week hit a nine-month high of $71.80 a barrel as a strike in Nigeria threatened more of the country's output and Iran remained defiant over its nuclear programme.

Soft commodities, including food, have long been tipped for explosive price growth. But some analysts believe the fears are overdone and prices may be close to peaking. Among them are Julian Jessop, chief international economist at Capital Economics. He argues that prices of agricultural commodities are already levelling out, and says UK consumers will be protected from the worst of the increase in global food prices, normally prices in dollars, by the high pound.

"The world's population has been growing rapidly and consuming more food of all types throughout history and yet the long-term trend in real food prices is still down," he said.