Inflation in the UK unexpectedly increased on Wednesday, rising by 10.4 per cent in the year to February, Office for National Statistics figures showed.
This compares with an inflation figure of 10.1 per cent in the year to January.
The shortages were compounded by the fact that few British greenhouse growers like cucumbers and tomatoes, given the rise inenergy costs.
On a monthly basis, the Consumer Prices Index rose by 1.1 per cent in February, compared with a rise of 0.8 per cent in the same month last year.
The rise was the first time the rate of inflation has gone up in four months, and puts pressure on the Bank of England to raise interest rates at its meeting on Thursday.
Food inflation
The upwards pressure on inflation was largely driven by food price increases at restaurants and retailers.
Food and drink prices are at their highest for 45 years, said Grant Fitzner, chief economist at the Office for National Statistics.
He said there were “particular increases for some salad and vegetable items, as high energy costs and bad weather across parts of Europe led to shortages and rationing”.
“These were partially offset by falls in the cost of motor fuel, where the annual inflation rate has eased for seven consecutive months,” Mr Fitzner said.
Higher prices of staple ingredients were a big factor in overall food price increases, said Kevin Bright, a partner at McKinsey.
“When you drill down into where the price rises are occurring in the food category, a large portion are being driven by those containing grains, eggs, oil and certain proteins: bread (up 20.8 per cent), pasta products and couscous (up 25.3 per cent), margarine and fats (up 30.4 per cent) and eggs (up 32.5 per cent),” Mr Bright said.
“It is not just that essential items are weighing heavy in the basket, retailers are also rationing items — which will keep prices higher for longer.”
Supermarkets introduced buying restrictions on some fresh fruit and vegetables last month, when supply problems emerged after bad weather and transport issues in Spain and Morocco.
The shortages were compounded by the fact that few British greenhouse growers could afford to plant crops such as cucumbers and tomatoes, given the increase in energy costs.
"It's grim", said Tony Montalbano, the chief executive of Green Acre Salads. "It wouldn't be worth me growing any more.
"We are cutting back this season, due to energy costs being too expensive. Last season my average gas bill was up by five times more than my average season." he added.
After the release of the inflation figures, Chancellor of the Exchequer Jeremy Hunt said that “falling inflation isn't inevitable”, and that “we need to stick to our plan to halve it this year”.
“We recognise just how tough things are for families across the country, so as we work towards getting inflation under control, we will help families with cost-of-living support worth £3,300 ($3,680) on average per household this year,” Mr Hunt said.
Shadow chancellor Rachel Reeves said: “The reality is that under this Tory government, families are feeling worse off and nothing is working better than it did 13 years ago.
“The cost-of-living crisis is still biting hard and taxes are rising, yet the government chose to use the budget to hand a £1 billion bung to the top 1 per cent.”
Interest rates
The rise in the inflation figures will make the Bank of England's decision on interest rates on Thursday even more finely balanced.
The Bank of England's Monetary Policy Committee was already having to contend with the global fallout from the banking sagas at Silicon Valley Bank and Credit Suisse, as well as the possibility of a recession in the UK.
But the MPC had been hoping inflation was, at least, moving in the right direction.
“There are concerns that the banking scare will end up being a disinflationary force by leading to a knock-on effect on lending which could hit the spending of companies and consumers, if loans are a bit harder to come by,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“The housing market is already reeling from the effects of a spike in mortgage rates and if lenders turn more cautious it could be another gut punch.
“So, given the potential headwinds which could whip up, the risk is that a hike now could end up pushing inflation below target further down the line.
“This is likely to be more of a background concern for policymakers right now, particularly as action to stem contagion in the banking sector appears to be working, but it may still mean a hike tomorrow will be the last one in the line.”
The increase in inflation has dashed the hopes of those who thought the worst of the cost-of-living crisis may be over, said Alice Haine, personal finance analyst at Bestinvest.
“Rising inflation delivers a fresh blow to households that were hoping the financial squeeze was finally starting to ease,” Ms Haine said.
“It means disposable incomes are still very much under threat when you consider the additional challenges posed by higher mortgage costs, falling real incomes, looming tax rises and the prospect that the Bank of England may hike interest rates for the 11th time in a row tomorrow.”
'Multi-headed hydra'
The jump in inflation caused the markets to factor in a rise in interest rates by the Bank of England on Thursday, which gave a boost to the pound.
A 0.25 per cent increase in UK rates is fully priced in by the money markets, which also now have interest rates peaking at 4.75 per cent in August.
“In recent days some have suggested that the febrile environment in the banking sector should give central banks pause for thought before raising rates further,” said Kitty Ussher, chief economist at the Institute of Directors.
“Today’s data suggests the opposite. The Bank of England’s job is not yet done.”
Meanwhile, traders are keeping an eye on developments at the US Federal Reserve, which will announce its latest decision on interest rates later on Wednesday.
CME's Fedwatch Tool currently has the chance of a 0.25 per cent increase by the Fed at 90.8 per cent.
"Last week, the European Central Bank carried on with its hiking cycle, and with the Fed expected to do something similar, the likelihood of a co-ordinated approach seems inevitable, even though another rate rise at this juncture adds further pressure to an economy which has thus far avoided recession by the narrowest of margins," said Richard Hunter, head of markets at Interactive Investor.
Stefan Koopman, a senior macro strategist at Rabobank in Amsterdam, referred to inflation as a "multi-headed hydra that pops up at various places and it's very hard to eradicate".
Until the release of the latest UK inflation figures, there had even been talk of the Bank of England leaving interest rates on hold on Thursday, given the stability issues in the global banking sector, thanks to the likes of SVB and Credit Suisse, and the fact that, up until now there had been a few months of declining inflation.
“Whatever flexibility the Bank of England may have thought it would have tomorrow was wiped out by this morning’s inflation data and, once more, the topic of conversation has shifted to whether 25 basis points (0.25 per cent) will be enough,” said Craig Erlam, a senior market analyst at Oanda Europe.
