Bank of England warns: 'There's NOTHING we can do to stop the pain of prices soaring'

The Bank of England has warned it can do nothing to alleviate the pain of rapidly rising prices over the coming months. 

Governor Mervyn King signalled living standards will continue to be squeezed by inflation-busting increases on food and fuel well into 2009. 

Attempting to curb the rampant price increases by raising interest rates sharply could lead to an even more painful economic downturn, he said. 

Mr King made the comments in the Bank's annual report amid new evidence that the pressure on incomes is intensifying. 

The cost of products leaving UK factories rose 10 per cent in the year to June - the first double-digit increase recorded by the Office for National Statistics for 20 years. Food costs rose by 11.8 per cent, while prices for petroleum products rose by 34.2 per cent, the report showed - the largest increases on record. 

These are likely to feed into the prices paid by shoppers on the High Street, exacerbating Britain's inflation problem and the misery being felt by families. 

Gordon Brown said the recent rise in oil and food prices, coupled with the credit crunch, had caused 'unprecedented' problems around the world. 

The Prime Minister admitted families are feeling the pain of soaring costs 'every time they go to the petrol station or the supermarket'. 

He said the Government is considering taking steps to help families cope with the
rising cost of living, but declined to give any detail. 'We have a responsibility to help people through these difficult times, and yes we will consider extra measures,' Mr Brown said. 

Economists expect official figures today to show that the consumer prices index rose an annual 3.6 per cent in June. 

That would be the highest inflation reading since the summer of 1992, and well above the three per cent limit tolerated by the Bank of England.

But the Daily Mail's Cost of Living Index suggests the pain is even more acute for families across the country. 

The cost of a basket of key products soared an annual 17.8 per cent in July, the index shows. A household which spent £100 a week on food last year now needs to find another £18 a week, or £936 a year.

Meanwhile the annual average cost of driving a diesel car has surged by around £365, while the cost of heat and light is up by just over 14 per cent - £131 a year - taking it to £1,056. 

Mr King said he expects to have to write a series of explanatory letters to Chancellor Alistair Darling over the coming months as inflation repeatedly breaches the Bank's target. 

But he added that the Bank has been avoiding swingeing interest rate rises because this could drive the economy into an even steeper slowdown. 

Mr King said: 'We are now faced for the second time in less than two years with the prospect of a sharp, but temporary, rise in inflation, this time mainly from the impact of energy and food price rises. 

'In fact, it is likely that inflation will remain above three per cent until well into next year. 

'The Monetary Policy Committee can have little impact on the path of inflation in the short term. 

'It has not attempted to prevent inflation moving away from the target following the sharp rises in commodity prices. 

'To do so would have required a large increase in interest rates, with such a severe impact on output and employment that it would have risked inflation falling well below target further out.' 

Large rises in borrowing costs would also pile on the pain in the housing market, which is already heading for its worst slump in decades. continues here

Cost of a shopping basket soars in the 'phoney' supermarket price war

British supermarkets have introduced massive price hikes over the past year, shattering the myth of a so-called price war in which grocers are bending over backwards to help hard-pressed consumers. 

Tesco, Asda and Sainsbury's have ramped up the price of many products by between 22 and 32 per cent over the past 13 months, hitting customers at a time when the cost of living is soaring, The Independent can reveal. 

The soaring figures illustrate the level of food inflation heaped on consumers, as they face spiralling petrol prices, rising utility bills and stagnating house prices. The revelation comes at a time when grocers are as active as ever in claiming that they are delivering millions of pounds of price cuts to consumers. 

On a sample of 17 products, Sainsbury's has hiked prices by 31.6 per cent, Tesco by 27.5 per cent and Asda by 21.6 per cent between 11 June 2007 and 11 July 2008, according to grocery price comparison site, mysupermarket.co.uk. 

The Independent tracked 17 products including thick-sliced white bread (800g), six pints of semi-skimmed milk, English butter (250g) and garden peas (1kg).

Tesco has raised the price of white bread from 54p to 72p; Sainsbury's has hiked the price of Basmati rice (1kg) from 90p to £1.89p; and Asda has increased English butter from 58p to 94p, as have its other two rivals. 

These figures dwarf the estimates of the British Retail Consortium, which this week said that food cost 7 per cent more in British supermarkets in June than it did in the same month last year. 

Before the last weekend in June, Tesco said it would reduce the price of 3,000 items by up to 50 per cent, while Asda promised to sell 10 staple items, including bread, eggs and butter for only 50p until end of trading on 29 June. However, industry experts say the current activity on price does not compare to previous battles, and is more about PR than helping consumers. 

Greg Lawless, an analyst at Blue Oar, says: "I don't think there is a price war. This is a price skirmish. The last proper price war we had was in the early 1990s ... It's not in Tesco and Asda's interests to launch a price war as it would suck profits out of the sector." 

Retailers themselves agree. Malcolm Walker, chief executive of the frozen food specialist Iceland, said successful retailers would not do anything to jeopardise their profit margins. He said: "No retailer can afford to drop more than one point – one-tenth of 1 per cent – on the gross margin and anything they do on price is tactical." He added: "It is all marketing and spin."

Bryan Roberts, global research director at Planet Retail, made the point that price cuts and promotions were often funded by suppliers. He said: "Effectively, promotions cost the retailers nothing because it is the suppliers who are often asked to invest in these 'price promotions'." 

The big three grocers say that while the price of commodities, such as wheat, meat and dairy products, have risen sharply over the past year, they try to cut prices for products that are not affected by the same inflationary pressures. continues here