Food prices threat to inflation ceiling

According to the Centre for Economics and Business Research (CEBR), the appalling summer weather will add to upward pressure on food prices and interest rates, with the Consumer Price Index boosted by half a percentage point in total by the end of the year. The result, says the CEBR's chief executive, Douglas McWilliams, is that the official inflation measure "could again breach the 3 per cent target, causing the governor of the Bank of England to have to write an explanatory letter".

And in an assessment of the impact of the credit-market downturn on UK growth, forecasting group Oxford Economics warns in a report to be published tomorrow that the impact on Britain's financial sector could be greater than that on its US counterpart, with a potential halving of growth.

It predicts the direct downturn in the financial services industry could cut 0.4 per cent off GDP growth. It warns that there would be broader effects, with other sectors such as financial and business services - accounting for 28 per cent of overall GDP and half of GDP growth last year - also affected.

Multiplier effects from reduced employment and lower bonuses in the financial sector - the phenomenon that has swollen the wallets of London's "Richistan" - will also ripple through other sectors, including the important residential housing market. The final result could be a period of below-trend GDP growth, such as that of 2002.

Ironically, the turbulence in financial markets over the past week has been fuelling hopes that a further rise in interest rates to 6 per cent could be avoided.

The monetary policy committee is widely predicted to keep rates on hold at its meeting this week, while there has been growing anxiety that a rise in the autumn could further destabilise market conditions and confidence.

But now come predictions that a sharp rise in food prices in the autumn may leave the committee with no alternative but to hoist rates further.

The CEBR calculates that while Britain's stormy summer may have little overall impact on GDP, it carries worrying inflationary implications, not just through higher insurance premiums but also through higher food prices. UK arable production could be down by as much as 10 per cent, while feeding costs for livestock will be higher - and reflected in higher meat prices over time. Agricultural GDP could be down by at least 600 million.

Food prices are already up by 4.6 per cent this year and the summer floods could hoist food prices by an additional 3-4 per cent in total, adding a further 0.3 points to the CPI.

Farmers, the CEBR says, won't be much better off, because their production losses will offset their higher prices, "but for consumers, this is a direct hit to their disposable incomes".

The CEBR calculates that lower consumer spending could reduce GDP by 0.3 per cent or 2 billion for the second half of the year.