Retailers call for rate cut after food inflation falls

Manufacturing output is also down as economy slows

Retailers are demanding a full percentage point cut in interest rates today after annual food inflation fell by its largest amount in nearly three years in October. Stephen Robertson, the director general of the British Retail Consortium, said: "A one-point cut would be a great Christmas present for hard-pressed households and the kind of bold tactic that could get the economy moving."

He urged banks to pass on to consumers the expected rate cut, although they are unlikely to benefit by the full amount. Most economists expect the Bank of England to reduce interest rates by at least half a percentage point today.

The calls for a big cut in interest rates gathered pace yesterday after the latest BRC-Nielsen Shop Price Index showed annual food price inflation fell to 7.5 per cent in October from 9.1 per cent the previous month. This was the biggest drop since the BRC started the current survey in December 2005.

Mr Robertson said: "After a painful climb to the food inflation peak we're now accelerating down the other side. Food inflation is falling. It's falling more rapidly and we're now at the lowest rate since May." This was the second consecutive month that annual food price inflation has fallen from its peak of 10 per cent in August.

Elsewhere in the economy, the latest data also suggests that there is both a need to cut interest rates and that the Bank of England has more latitude – in the context of its battle to get inflation back under control – in doing so.

Yesterday, the latest Purchasing Managers' Index Services survey, which measures services output, ratcheted up the pressure on the Bank of England to slash rates. The survey tumbled from 46 to a new record low of 42.4 in September, the weakest since the series began in 1996.

Crucially, the survey also suggested inflation was now falling sharply across the economy, which would make it easier for the Bank's Monetary Policy Committee to cut rates for a second month running.

The Office for National Statistics said that manufacturing output had fallen by 0.8 per cent in September, which takes the total decline over the past two months to 1.4 per cent. Prices are also now rising much less quickly in this sector of the economy.

George Buckley, the chief UK economist at Deutsche Bank, said: "The escalation of the economic slowdown justifies, in our view, a full percentage point off interest rates at today's meeting." The last time rates were cut so aggressively was in January 1993. Mr Buckley said that base rates had not moved by 75 basis points in any month since the late 1970s.

The overall shop price inflation of retailers fell to 3 per cent in October from 3.6 per cent the month before, boosted by further aggressive promotional activity.

However, Mike Watkins, the senior manager of retailer services at Nielsen, the market research company, said: "Consumers will continue to be cautious on all discretionary spend for the next few months."

Deflation in electricals and clothing is also driving down total non-food price inflation, which fell to 0.7 per cent in October, from 0.8 per cent the previous month, according to the BRC-Nielsen Shop Price Index.

The consensus in the City remains that the Bank will cut rates by 0.5 percentage points today, with some analysts warning that a large cut could, in the short term, do more harm than good, because it would be widely seen as a panic measure.