Higher prices for fruit and veg dampen hopes of inflation fall

The recent easing of the inflation squeeze on British households will suffer a setback this week as June's record downpours drench seasonal crops and push up prices.

Analysts expect the Bank of England's official Consumer Prices Index benchmark to remain steady at 2.8 per cent in June after two months of steep falls.

The cost of living is currently rising at its slowest rate for two and a half years, but price hikes for seasonal fruit and vegetables due to the poor weather will partly offset the impact of a big 3.3 per cent fall in petrol costs over the month.

David Page, Lloyds Bank Corporate Markets' UK economist, said: "The climate across most of northern Europe is fairly similar and we've already seen price rises of between 7 and 8 per cent for German seasonal food, so it is likely to have an impact over here."

The opposite problem in the US raises the spectre of renewed food price inflation later this year as a scorching drought across the Midwest slashes corn yields by more than 12 per cent. Corn prices have jumped more than a third in the past four weeks, according to the Chicago Board of Trade. Higher cereal prices will have a more sustained effect as the cost of animal feed and meat rises.

Sharp price-slashing by retailers in June last year – not repeated last month – will also add to inflationary effects, Capital Economics said.

The Bank of England nonetheless predicts CPI will be back to 2 per cent by the end of the year. Worries over undershooting the target prompted it to pump an extra £50bn into the economy via quantitative easing two weeks ago.