Food price rises kill rate-cut hope

Members of the Bank's monetary policy committee (MPC) met to discuss interest rates just as figures showed the cost of food on the High Street rose by 2.7% in September.

Prices were driven higher by the soaring cost of wheat, which has seen the price of a loaf of bread reach more than £1, while the cost of eggs, milk and cheese has also risen.

The figures from the British Retail Consortium (BRC) made a cut in interest rates tomorrow unlikely.

Many in the City have called for rates to be reduced in a bid to head off a sharp slowdown in the economy in the wake of the credit crisis. But members of the MPC are known to be worried about making such a move at a time when high food - and oil - prices could cause inflation to spiral.

Inflation fell back below the 2% target for the first time in more than a year in July and is now running at 1.8%. The Bank is determined not to let it rise above target again. Howard Archer of Global Insight said the Bank was firmly in "wait and see mode" and would leave rates unchanged at 5.75% tomorrow, having raised them five times since August last year.

"We believe the Bank of England will remain very wary for now about trimming interest rates, given that current elevated oil prices, higher food prices as a result of the bad weather, and lessfavourable base effects seem likely to exert upward pressure on inflation over the next few months," said Archer.

There was some relief for the Bank as the cost of non-food items fell last month by 0.7%, leaving overall shop price inflation at just 0.4%.

But in the capital, High Street prices for all goods were up 2.8% last month as stores continued to bet on rich Londoners spending money.

BRC director general Kevin Hawkins said: "Overall shop price inflation is being kept low yet again by intense price competition and promotional activity within non-food. However, this is being outweighed by food, where cost inf lation is starting to work through to retail prices, espiecially in fresh produce.

"A large proportion of these cost pressures are being absorbed by retailers, helping to keep prices down. However, we have yet to see the full effects of higher interest rates on consumer spending and a rate cut now by the Bank of England would provide some much-needed relief to consumers and retailers alike."

Torrential rain damaged harvests around the world this year, and the BRC warned food prices will continue to rise as supplies struggle to meet demand.

Many retailers have not passed on the full impact of higher food costs to customers. Asda, for instance, is absorbing most of the so-called "agriflation" itself amid fears customers will defect to cheaper rivals such as Lidl, Aldi and Netto if it puts up prices.

You can download the full Shop Price Index surveys for the United Kingdom and London at www.brc.org.uk

Bank of England interest rate decisions can be seen at www.bankofengland.co.uk