Inflation on the high street soared in July to reach its highest in more than 18 months, with food nearly 10 per cent more expensive than a year ago, according to a survey conducted by the British Retail Consortium (BRC).

The BRC shop price deflator estimated that shop prices last month were 3.2 per cent higher than a year ago. This is a significant increase on June’s year-on-year shop price inflation figure of 2.5 per cent, and is the biggest increase since the survey began in December 2006.

Annual food price inflation hit 9.5 per cent in July, up from seven per cent in June. Non-food prices edged up by 0.1 per cent year-on-year in July. This was down from a rise of 0.2 per cent in June.

BRC’s figures show that some non-food goods, including electricals and clothing, are cheaper than they were a year ago. Both food and non-food prices are going up more slowly than gas or petrol bills. Overall food prices are rising but retailers are keeping increases well below the extra supply and operating costs they face.

Falls in the prices of oil and some world food commodities, such as wheat and soya, provide hope but most retail costs remain sharply up on a year ago and are still rising.

This report has brought the Bank of England’s monetary policy committee under more pressure as it is confronted with the twin risks of rising inflation and looming recession. .

Meanwhile, the Financial Services Authority has announced that 9,152 homes were repossessed in the first three months of the year, a rise of 40 per cent on the same period in 2007. It also reported that the number of mortgages three months or more in arrears rose by 15 per cent, to 302,000, in the three month period – 2.5 per cent of Britain’s total mortgage loan book.

This announcement has crearted a kind of panic in the government and Chancellor Darling is said to be looking at a number of options to meet the crisis.

He wants to reintroduce income support for mortgage interest payments for home owners who lose their jobs. Second, he is considering suspending stamp duty so buyers only pay the tax after several years in their new home, or perhaps not until they sell the property. And third,he does not feel averse to creating a new, tax-free fund to help first-time buyers raise the deposit they need to get on the housing ladder.

Mr Darling has not ruled out completely the the possibility of stopping the stamp duty altogether for the duration of the current downturn.

Meanwhile, the government is said to be probing the economic justification or otherwise of extending a scheme to buy empty properties, particularly in city centres, and turn them into social housing.

Most analysts here believe that the government would finally opt for deffering, rather than cancelling the stamp duty charges paid by the majority of home buyers.

The government is also considering to levy stamp duty at its higher rate only on that part of the price above the threshold, rather than triggering the tax on the whole amount. That would also remove the distortions in the market around the threshold levels.

The stamp duty is paid at one per cent on homes bought for between £125,001 and £250,000, three per cent between £250,001 and £500,000, and four per cent for properties bought for more than £500,000. Overall, the levy has brought in £31.5 billion over the past 10 years, and has increased rapidly as house prices have risen.

A new saving scheme aimed at first-time home buyers is being considered. It would enable them to put cash into a tax-free fund similar to help build the deposit required by most lenders, who are refusing to offer 100 per cent mortgages because of the credit crunch.

Meanwhile, Bank of England is expected to be approached with a suggestion to reform its new Special Liquidity Scheme, which would allow banks to swap unmarketable but relatively good quality mortgage-backed securities for government securities. Thus, the state in effect lends the banking system the money to grant mortgages, using older mortgage books as collateral on the loan, albeit at a punitive rate of interest.

Some analysts, however, say that while a fundamental reform of stamp duty would no doubt prove popular, tinkering with it is not a solution for the market’s current problems.

They said at the root of the housing market’s current problems are a lack of mortgage credit and a growing expectation among home buyers that prices have further to fall. Neither deferring stamp duty for some buyers, nor offering them tax-free savings accounts will stimulate the supply of mortgage credit or alter the fact that, despite recent falls, house prices remain too high.

A nationwide survey, released Wednesday last showed that households expect a further five per cent drop in house prices by year-end, a sharp turnaround compared to the optimism of last summer. Both the lack of credit and the switch in expectations ultimately reflect a growing recognition of the fact that the boom of the past decade left the housing market seriously overvalued.

They said what most first time buyers want are lower house prices. Someone with a 10 per cent deposit, buying a property worth £130,000 would currently pay £1,300 in stamp duty and, assuming a six per cent interest rate, mortgage payments of £9,050 a year. Deferring stamp duty would temporarily cut his purchase costs by £1,300. But a five per cent fall in the purchase price, to £123,500, i.e. under the one per cent stamp duty threshold, would permanently cut his purchase costs by £1,300, and cut his mortgage costs by over £500 a year.