Surge in food prices keeps inflation high

RISING food prices offset a drop in the cost of fuel in July but annual inflation remained stubbornly above 3 per cent in July. The strong inflation figures forced Bank of England governor Mervyn King to pen his second letter of explanation to chancellor George Osborne and to admit that the Monetary Policy Committee (MPC) had been surprised by the recent strength of inflation.

Official figures revealed that inflation eased slightly to 3.1 per cent thanks to expected lower petrol prices and a sharp slowdown in the inflation rate for second-hand cars.

But with food prices surging 0.7 per cent in July – the biggest monthly jump for two years according to the Office for National Statistics (ONS) – annual CPI inflation rate stayed more than one per cent above the Bank’s two per cent target. Potatoes, onions and cauliflowers were the fastest risers in price, according to the ONS. Henderson’s chief economist Simon Ward said: “The impact on the near-term inflation outlook is offset by the likelihood that food price rises will remain stronger than previously expected, given recent increases in raw commodity costs.”

In his letter to Osborne, King reiterated last week’s forecast that inflation would remain above target until the end of 2011 at the earliest and warned that there remained a significant probability that he would need to write further open letters.

However, he still emphasised the role of temporary factors – the weakening of sterling, previously high oil prices and the VAT hike – in pushing inflation to its current levels.

The retail prices index (RPI) slowed to 4.8 per cent in July from five per cent the previous month. The ONS mainly attributed the sharper fall in the RPI to insurance, which has a far higher weight in the RPI than the CPI. The RPIX, which excludes mortgage interest payments, fell to 4.8 per cent.