Shop prices rose at their fastest rate in two years in July a survey showed yesterday, in another sign of growing inflationary pressure as the Bank of England's Monetary Policy Committee starts its two-day meeting.
The British Retail Consortium said shop prices last month rose 0.69 per cent on the year, the biggest jump since July 2004 and suggesting CPI inflation - already half a point above the central bank's two per cent target - could rise further still.
Most economists expect the BoE's rate-setting committee to keep interest rates at 4.5 per cent for the 12th month running tomorrow, but the risk of an increase clearly is greater than any time in the last 12 months.
"The higher shop prices reported by the BRC in July suggests healthier sales in recent months have boosted the pricing power of a number of retailers and enabled them to push through limited price hikes," said Howard Archer, economist at Global Insight.
Policymakers have given no indication they are preparing to raise interest rates and financial markets shrugged off the BRC figures but the BoE's mandate is to keep inflation at two per cent.
It hit 2.5 per cent in June as household bills surged.
Retailers feeling more confident about raising prices coupled with a further round of utility bill hikes raises the risk of inflation creeping higher still.
BoE Governor Mervyn King has warned that growing inflationary pressures around the world, particularly China, could raise the cost of imported goods in Britain, one notable feature that has kept a lid on prices in recent years.
House price inflation is also accelerating. The Nationwide building society reported the cost of an average home jumped 0.8 percent in July.
Energy prices, meanwhile, are not likely to ease much in the coming months even if the giant US economy slows down, given the continuing tensions in the Middle East.
Policymakers may also be concerned, however, that higher energy prices can act as a tax as they cut disposable incomes especially when a slacker labour market means it is harder for workers to demand compensatory wage increases.
"On balance, we still expect the MPC to leave interest rates unchanged on Thursday, but it is looking a very tight call," said Mr Archer.
