Food inflation 'could drop to near 1 per cent soon'

The lingering cost-of-living squeeze on household budgets could ease much sooner than the Bank of England expects, thanks to falling food prices, experts said yesterday.

The verdict came as the Bank's consumer price index (CPI) benchmark of the cost of living eased from 2.8 per cent to 2.7 per cent in August – the lowest since April.

The decline was largely driven by lower price rises at the petrol pump and smaller increases in clothing costs than last year, although the current level of inflation is still more than twice the level of annual pay growth, at 1.1 per cent.

The Bank expects the cost of living to remain above its 2 per cent target until the end of 2015, but economists said price drops in the pipeline could bring inflation down much sooner. Food prices are currently rising at an annual rate of 4.7 per cent, but this is set to fall rapidly, dragging down the cost of living.

Philip Shaw, Investec's chief economist, said: "The fall in wholesale food costs – for example, global wheat prices have plunged by 25 per cent in sterling terms over the past year – will result in a continued moderation in inflation over the next six months. We continue to see a good chance that the targeted measure hits 2 per cent early next year, which compares with the Montary Policy Committee's view that it will be at 2.8 per cent in the first quarter."

Factory-gate prices, which tend to lag behind CPI data, slowed to 1.6 per cent last month. Samuel Tombs of Capital Economics said: "Movements in commodity prices suggest that food inflation could drop to about 1 per cent soon. We continue to think that CPI inflation is likely to fall back to the target within the next few months – a development that would help ease the squeeze on households' real earnings."