The Food and Agriculture Organisation food commodities price index – covering meat, dairy products, cereals, oils and fats, and sugar – rose by a further 7% in sterling terms in September, pushing annual growth up to 29% from 23% in August. This suggests upside risk to the forecast in a previous post that CPI food inflation will reach an annual 7% by late 2010 – see chart.

CPI food inflation rose from 3.0% in July to 3.9% in August. A further increase to 7% would add 0.3 percentage points to headline CPI inflation, given food's 9.6% weight in the basket. The headline rate was 3.1% in August.

A further boost is possible via the "catering services" (i.e. restaurants and cafés) component, with a 9.8% CPI weight. A rise in annual inflation to 4% from 3.1% in August would add 0.1 percentage points to the headline CPI rate, for a total 0.4 point impact.

Petrol prices have dampened CPI inflation recently and base effects are favourable until next spring but crude oil prices are climbing again. So are wholesale gas costs – Ofgem this week suggested that domestic gas bills will rise by 13% by next spring, above the 5% increase assumed by the Bank of England in the August Inflation Report. With a 2.5% weight, this would boost the headline CPI by 0.3 percentage points.

The latest survey by the Bank's regional agents, meanwhile, confirms earlier intelligence that most firms plan to pass on the coming VAT hike in full. The Bank estimates that this will add more than 1 percentage point to annual CPI inflation in 2011 but the effect is likely to be felt sooner as firms front-load increases.

These developments suggest significant upside risk to the Bank's forecast that inflation will stabilise at about 3% before starting to fall next spring. A rise to 4% is possible if the various adverse effects coincide. A renewed inflation increase would make it difficult for the MPC to embark on "QE2" asset purchases; doves may wish to press their case at next week's meeting before the window for action closes.