'Perfect storm' grows as inflation rate hits 26-year high

Inflation hit a 26-year high today and stock markets crashed around the world.

Panic gripped the City and Wall Street as the global economy drifted towards "a perfect storm", adding to pressure on Gordon Brown a week before a crucial by-election.

In today's bout of financial turbulence:

The FTSE 100 Index fell 160.2 points in frantic trading as confidence drained out of the stock market. It later recovered some ground but bank shares are now at their lowest level for a decade.

The Dow Jones Industrial Index dropped more than 200 points after Federal Reserve chairman Ben Bernanke admitted the US economy faces "numerous difficulties".

The dollar fell to a record low against the euro as currency markets panicked over the deteriorating finances of two US mortgage giants and the "parlous state" of the US economy.

American depositors were queuing to take out their savings after a collapsed bank had to be taken over by the government in their version of the run on Northern Rock.

Billionaire investor George Soros said it was "the most serious financial crisis of our lifetime".

The cost of feeding a family has soared by more than 10 per cent in the last year, the highest rate for more than a quarter of a century.

Shock inflation figures today revealed that a typical weekly food shop costs 10.6 per cent more than last year.

The last time food prices were rising in double digits was 26 years ago, in May 1982.

The Government's official measure of prices, the Consumer Prices Index, jumped from 3.3 per cent to 3.8 per cent last month, higher than City economists were forecasting. Prices are now going up at the fastest rate since May 1992.

The figures are a huge blow to the Bank of England's efforts to bring inflation under control and starkly illustrate how the global oil crisis is hitting virtually every household by forcing up prices.

It also means that any remote chance that the Bank might cut its base rate next month has now been crushed. The Bank's target is a two per cent inflation rate.

City forecasters rushed to rewrite their predictions for the economy after the figures were released. Most had been expecting inflation to peak at around four per cent in the autumn but some now fear it could hit five per cent.

Jonathan Loynes, chief European economist at Capital Economics, predicted that at the current rate of inflation, CPI would hit 4.5 per cent or five per cent in the run-up to Christmas.

He said: "We still think that inflation will drop back sharply next year, eventually freeing the way for deep interest rate cuts. But there is worse to come first," he said.

Today's figures show that some staples such as butter have gone up by almost a third in a year while bread, cheese and milk are almost a fifth higher. Food prices have been forced up by rising distribution-costs, bad weather, including-last summer's floods, and shortages caused by the rush to convert land to bio-fuel crops.

Although some goods, including clothes and CDs, are still falling, there is growing evidence that non-food prices are starting to rise. A survey by the British Retail Consortium showed the first rise in non-food prices on the high street since 2006. Carpets, books and restaurant meals are costing more.

However, most economists still see the rises as a temporary "spike" caused mainly by oil rises rather than a move towards Seventies-style hyper-inflation-John Cridland, deputy director general of the CBI, said: "The fact that the economy is slowing will bring inflation down, but not until next year."

But unions bosses gave an ominous warning of potential conflict over the higher cost of living. TUC general secretary Brendan Barber said: "With prices soaring in supermarkets and petrol stations, families are increasingly concerned at how they are going to make ends meet.

"Wages, particularly in the public sector, are falling further and further behind the cost of living, effectively leaving millions of workers to suffer a pay cut."

Bank of England Governor Mervyn King has sent a signal to employees by turning down a £100,000 pay rise and accepting an increase of only 2.5 per cent, effectively a pay cut.

Shadow chancellor George Osborne attacked Mr Brown, accusing the PM of "shrugging his shoulders" and doing nothing. "The official figures have caught up with everyone's real experience of rising prices," he said.

"Inflation is now more than double the rate that Gordon Brown inherited from the last Conservative government.

"What a contrast between Gordon Brown who shrugs his shoulders and says there's nothing he can do about it, and the Conservative Party which is putting forward an economic recovery plan."