Page last updated at 23:13 GMT, Monday, 19 May 2008 00:13 UK

Food price rises 'to hit UK hard'

Wheat prices have risen sharply in recent months
The UK has a trade deficit in food

The UK is "more exposed" to rising food price rises than its peers, adding to recessionary fears, according to a report by Ernst & Young.

Its Item Club says "the implications for business are profound" - making it more likely firms will raise prices.

Unlike the US which has a balance of food and France which has a surplus, the UK has a trade deficit in food.

World food prices have risen due to population growth and poor climate in the major cereal producing nations.

Another factor is a growth in the production of biofuels, as crops are being turned into energy rather than food for humans, the report states.

Increasing wealth in developing nations - especially China - has prompted a higher demand for meat and livestock products.

UK import and producer prices

With the world population set to hit 8.3 billion in 2030, from 6.6 billion today, this trend will continue according to the report.

It says rising food prices are having "devastating impacts on the living standards of the poor in many developing countries".

Food accounts for up to 60% of household spending in many developing countries, and there has also been recent food unrest in Mexico, China and Russia among others.

Monetary policy

The Item Club report says that as food prices keep rising, this reduces the chance of an interest rate cut in the UK.

"The danger now is that rising food world prices and energy prices will lead to excessively tight monetary policy", it says, as the government seeks to counter the rise by "squeezing domestic costs".

As food and energy prices contribute 1.7% to Consumer Prices Index Inflation - which recently reached 3% - this leaves "little room" for price rises elsewhere.

Input costs have risen by nearly a quarter in the 12 months to April, eating into consumers' disposable incomes.

As a result, says the report, the government faces an "indigestible menu of short-term policy choices".

The Item Club also says that the government's choices include sticking to the current inflation target of 2% - which could mean no more interest rate cuts for some time, and therefore lower economic growth.

It adds that another option is to mitigate the impact of high food prices by reducing other taxes, including Value Added Tax, but given the government's poor finances this option is not a serious one.

Or the UK government could change its inflation target above 2%.

"There is a good case for switching the [inflation] target to core CPI inflation, which excludes the effect of food and energy prices," says the report.

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