Food price inflation could force rates hike
A spike in food-price inflation over the coming months is set to hit household budgets and pile the pressure on the Bank of England to raise interest rates, an influential research firm has forecast.
Grocery-price inflation is on track to jump from 2% to 4% by the end of the year, according to the market research firm Kantar Worldpanel, as events such as fires and droughts in Russia and Ukraine lead to soaring prices of wheat, barley, palm oil, cocoa, animal feeds and meat.
Other, industrial, commodity prices have been rising for some months, in response to demand from resurgent emerging economies such as China and India. These too will feed through to high-street inflation next year.
In another part of the high street, Next, the fashion retailer, said that clothing prices may rise by up to 8% next year. This reflects higher world cotton prices and pressure on capacity in China, where many garments are sourced. The 25% fall in the external value of the pound between 2007 and last year has boosted import prices. Together, these factors threaten the biggest inflation shock in 20 years.
Vladimir Putin, the Russian Prime Minister, yesterday warned that the country's recently imposed ban on grain exports could be pushed into next year as it seeks to conserve domestic supplies. Higher food prices will deal a further blow to UK household budgets at a time when they are already squeezed by tax rises, surging petrol prices, and many are anxious about their job prospects.
A rise in VAT to 20% on 4 January promises to hit poorer households especially hard.
This deadly cocktail of measures is set to create a precarious balancing act for the Bank of England's Monetary Policy Committee, as it weighs the risk of reining in inflation by raising interest rates from their historic low of 0.5% - or choking a hesitant economic recovery.
While food-price inflation hit a record low of 1.2% in April and May this year, a rise to 4%, as forecast by Kantar, is likely to lead to supermarkets increasing their prices.
Clive Black, head of research at Shore Capital, said: "I would expect the bulk of the food-price inflation to be passed on to consumers."