Britannia Radio

Food prices now rising at fastest rate for 28 years

By Sean O'Grady, Economics Editor
Wednesday, 13 August 2008

The Bank of England will today dramatically downgrade its forecast for
growth in the British economy and warn that inflation is set to continue
to rise.

The Bank will forecast a collapse in economic growth to about 1 per cent
next year, heightening fears that the British economy may soon slide
into recession. It will also signal still higher inflation over the next
few months, probably peaking at more than 5 per cent by September.

The Bank's quarterly Inflation Report comes just a day after food
inflation hit a 28-year high of 13.7 per cent. Overall inflation rose to
4.4 per cent in July, as measured by the consumer price index (CPI), a
jump of 0.6 per cent on June's annual rate of 3.8 per cent. Such a
downgrade in the Bank's forecasts will be deeply unwelcome to ministers,
as they prepare the Government's economic recovery programme in time for
the Labour Party conference next month and the pre-Budget report in
October.

Lower growth assumptions make it much harder for the Treasury to stick
to its fiscal rules and to fund any large-scale public spending
programmes to get the economy moving or rescue the housing market.

Hefty rises in the price of food and fuel were again behind most of the
rise in inflation, though economists also pointed to a worrying upward
trend in "core" inflation, with volatile items such as food removed.

On the retail price index, which includes mortgage interest payments and
reflects movements in house prices and accommodation costs, inflation
stands at 5 per cent, a level last seen in July 1991, with food
inflation the worst since July 1980.

Most economists see inflation topping out at 5 to 5.5 per cent over the
autumn, before the recent decline in oil prices feeds through early next
year. A return to the official target of 2 per cent may take more than a
year.

The Bank will have been aware of the inflation figures when it left
interest rates on hold last month, suggesting it sees the spike in
inflation as sharp but essentially short-lived.

Nonetheless, Governor of the Bank, Mervyn King, has repeatedly warned of
the squeeze on living standards that will have to be endured as a result
of the effects of the credit crunch and the boom in commodities prices.
Mr King will in all likelihood repeat his gloomy prognostications today.

With inflation at more than double the Government's target, and the UK
already named and shamed by the EU for being in breach of its financial
obligations under the Maastricht Treaty, ministers will have broken
virtually all of their economic disciplines.

At the moment the Treasury is still sticking to forecasts for growth
made by Alistair Darling in the Budget in March, but the range of 2.25
to 2.75 per cent is, even now, looking ludicrously optimistic and out of
line with the consensus of independent forecasts, of about half that
level. The IMF predicts the UK will grow by 1.1 per cent in 2009, down
from the 1.7 per cent for 2009 that it previously predicted. The Bank's
figures are unlikely to be far out of line.

A lower official growth estimate in the pre-Budget report will make it
virtually impossible to keep the total of national debt to the
Government's "sustainable" limit of 40 per cent. There have already been
strong hints that the fiscal rules – limiting the size of government
borrowing – will be fudged in the light of the credit crunch, an
unprecedented economic event that may be used as a justification for
finally abandoning the pursuit of prudence.

How we measure inflation

Despite criticism that they don't reflect the "real" cost of living, the
consumer price index (CPI) and the retail price index (RPI) are the best
guides to what is happening to prices. They cover more than 120,000
prices – from salted peanuts and inkjet cartridges to mortgage fees and
the cost of roadside repairs. They include seldom purchased items, such
as used cars, which have seen lower inflation, as well as "high
visibility", frequently-bought consumables like bread and petrol, which
have been going up more. The CPI dates from 1997, and is "harmonised" to
be on the same basis as other EU nations' statistics.

The RPI is used in wage negotiations and for the uprating of benefits,
rail fares and index-linked bonds. The RPI includes mortgage interest
payments and reflects to an extent house prices and rentals; the CPI
only includes rents and is the official target for interest rate policy.
Many, including the Bank of England Governor, Mervyn King, believe that
the target should include house prices.

http://www.independ ent.co.uk/ news/business/ news/food- prices-now- rising-
at-fastest-rate- for-28-years- 892853.html