Surge in food prices leaves Bank little room for manoeuvre

Annual food price inflation surged to 9.5 per cent last month as retailers passed on rising costs, further restricting the Bank of England's scope for cutting interest rates today.

The latest Shop Price Index, published by the British Retail Consortium and Nielsen yesterday, showed that overall shop price inflation jumped to a record 3.2 per cent in July compared with a year ago, driven by rising food prices. The year-on-year rise in food prices was up from 7 per cent in June and overall shop price inflation rose from 2.5 per cent – the survey's highest recorded figures since it began in December 2006.

The MPC is widely tipped to hold interest rates at 5 per cent today, as it faces a precarious balancing act of averting a sharp economic downturn while trying to keep a lid on rising inflation.

The International Monetary Fund yesterday cut its forecast for UK economic growth over the next two years – a move which will increase pressure on the MPC to cut rates. The IMF predicted the UK would grow by 1.4 per cent in 2008 and 1.1 per cent in 2009, down from the 1.8 per cent and 1.7 per cent that it predicted in July.

The British Retail Consortium's director general, Stephen Robertson, said: "Overall food prices are rising but retailers are keeping increases well below the extra supply and operating costs they face. Falls in the prices of oil and some world food commodities, such as wheat and soya, provide hope but most retail costs remain sharply up on a year ago and are still rising." Crude oil prices have an impact on supply chain costs, including those of packaging, storage, transportation and refrigeration.

Mike Watkins, the senior manager of retailing services at Nielsen, said its latest research indicates that 55 per cent of people in the UK are reducing their grocery spend as their other bills rise. Non-food annual price inflation in July rose by 0.1 per cent on the same month last year, but was actually down 0.8 per cent on June 2008. The price of electricals and clothing and footwear remain in deflationary territory, but all other non-food categories posted rising prices.

While non-food inflation was still minimal, the fact that non-food prices are rising demonstrates the cost pressures retailers faced in their supply chains, said the BRC.

Howard Archer, chief UK and European economist at Global Insight, said: "The further sharp rise in the shop price deflator in July is worrying news for the Bank of England. While shop prices continue to be pushed up primarily by high food prices, the Bank of England will also note that non-food prices edged up year on year for a second month running in July after extended falls."

Barclays Capital Research is forecasting that the July consumer price index, which is published next week, will hit 4.1 per cent before peaking at 4.7 per cent in September.