The message from the CBI was clear. After more than a decade in which the strong pound and low-cost imports have kept prices under control, inflation is back. The same forces that helped bear down on the cost of living - the exchange rate and globalisation - are now the transmission mechanism for pushing up prices in Britain. The recent weakness of sterling, particularly against the euro, means imports become dearer, amplifying the inflationary impacts of China's resource-hungry economic boom. The increased prices UK consumers are paying for petrol, milk and bread are partly due to what is happening in east Asia.

According to the employers' organisation, the inflationary pressures on industry are strong. It is 18 years since British factories have seen their non-wage costs increase as strongly as they have over the past three months, and despite weakening demand for their products, factories have been passing on part of the increase in fuel and raw materials prices to their customers. The CBI's industrial trends survey showed domestic and export prices charged by manufacturers were rising at their fastest pace since 1995.

The reports by CBI members are echoed by the official data. In March, input prices for UK firms - fuel and raw materials such as industrial metals - were more than 20% higher than a year earlier. Wages account for the biggest share of industry's total costs, but even so firms have been unable to increase productivity quickly enough to absorb a one-fifth jump in fuel and raw materials. As a result, they have been raising their tariffs, with so-called factory gate prices rising at an annual rate of 6.2%.

So far, these high levels of inflation as measured by producer prices have not fed through into the official measures of consumer inflation. The government's preferred measure of the cost of living - the consumer prices index - is running at 2.5%, only slightly above its 2% target. Most pay bargainers still use the retail prices index as the benchmark for their annual negotiations; on this measure, which unlike the CPI includes housing costs, inflation is running at 3.8%.

One view of the relationship between producer and consumer prices is that the official data is underestimating the true level of inflation faced by households. While the Office for National Statistics says that it looks carefully at what average families pay for goods and services, many of the groups representing the elderly and the low-paid insist that the true rate of inflation is a lot higher than 2.5% or even 3.8%. They point to steeply rising food prices - butter and eggs are rising more than 12 times as rapidly as CPI inflation overall - as an indication of what is really happening in the high street.

The ONS figures show a more mixed picture. Prices of some goods are not only down year-on-year but are actually cheaper than they were 20 years ago. Women's clothes, for example, are 6.8% down on the spring of 2007 and cost 5% less than they did in 1987. The most spectacular falls have been in audio-visual equipment, where technological improvements coupled with low-cost production in Asia have resulted in prices falling 20% in the past year and almost 90% over the past two decades.

Spending patterns, therefore, contribute significantly to an individual's inflation rate. A young person without a mortgage who spends a sizeable chunk of their income on clothes and the latest electronic gizmos is likely to have seen their personal cost of living rise far more slowly than a pensioner who needs the heating on for a larger part of the day and spends a bigger slice of their income on food.

The Bank of England conducts regular surveys to judge what the public thinks about trends in inflation and recently these have started to reflect the sharp increase in food and fuel prices. Threadneedle Street's anxiety is that there will be knock-on effects, with pay bargainers seeking to maintain living standards through higher pay deals and companies seeking to pass on increased costs to their customers. Ian McCafferty, the CBI's chief economist, says that the Bank's concern about an inflationary spiral will slow the pace of interest rate cuts this year.

Yesterday's data indicates, however, that retailers are having a tough time passing on cost increases in the current climate. With food and fuel becoming more expensive, consumers have less to spend on luxuries, and falling house prices mean they are less willing than before to withdraw equity from their homes. Strong competitive pressures in the high street mean that in a stand-off between retailers and consumers, the shopkeepers will blink first.

Price pressures



2.5%

The government's measure of inflation in the consumer prices index

12

Rate at which cost of butter and eggs is rising in relation to CPI average

3.8%

Inflation according to the retail prices index, which includes housing costs



90%

Drop in audio-visual equipment prices over the past two decades