Today's figures from the British Retail Consortium showing that the annual increase in shop prices jumped to 3.8 per cent in August, up from 3.2 in July, will add to the collective headache of the nine-member Monetary Policy Committee (MPC) as they settle down to discuss rates.

The continued increase in prices, particularly the 0.6 per cent rise in non-food prices in the 12 months to August, will fuel fears that rising oil prices are filtering through into the economy — the so-called "second-round" effect.

This raises the possibility that wages will begin to rise as workers demand more pay to cover their mounting expenses, causing a wage-price spiral and further embedding inflation into the economy. The Bank is extremely keen to avoid this and has called for wage restraint.

Yet it also has to deal with the fact that the economy is slumping, and could tumble into recession this year, according to a forecast from the Organisation for Economic Co-operation and Development. While inflation remains a threat, the Bank's MPC will be reluctant to cut rates, risking a deeper downturn in the economy.

Tomorrow's decision is widely expected to be a hold but the minutes, published in two week's time, should make very interesting reading.

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