Signs of a slowdown in the economy have been strengthened by the release of new figures which reveal consumer confidence at a four-year low while prices in British shops continue to rise.

The findings from Nationwide and The British Retail Consortium (BRC) will complicate the decision of the Monetary Policy Committee, which meets today and will announce its interest rate decision tomorrow.

While economists expect the Committee to cut rates, the rise in prices is likely to limit that cut to a quarter-point.

Prices in British shops continued to rise last month as food prices increased and Christmas discounts came to an end. The BRC said that shop prices were 1.2 per cent higher in January than a year ago, growing faster than in December when they were 1 per cent higher year on year.

The cost of food rose the fastest — 0.5 per cent more expensive in January than in December, up 3.9 per cent year on year. This is up from 3.8 per cent annual growth in December. Prices for non-food items continued to fall but at a slower rate than last month.

Howard Archer, of Global Insight, said: "The modest rise in the deflator in January is likely to maintain the Bank of England's concern that inflation pressures are still significant for now. In particular, the Bank of England will note that food prices are still rising markedly. Consequently, the BRC survey reinforces our belief that the Bank of England will limit Thursday's highly likely cutting of interest rates to 25 basis points from 5.50 per cent to 5.25 per cent. Going forward, we expect muted consumer spending to significantly dilute retailers' pricing power."

Nationwide, Britain's biggest building society, said that its confidence index fell four points to 81 last month, the weakest score since the series began in May 2004.

The number of people positive about the future employment situation over the next six months fell from 44 per cent in December to 36 per cent in January, lower than any of the scorings during 2007. In May 2004, 57 per cent of people were positive about their jobs.

The findings follow several weeks of job culling from banks in the City in the wake of the credit crunch, but fears are growing that a slowing economy will trigger more job cuts in industry. Yesterday BP announced that it was cutting about 1,500 UK jobs, part of a 5,000 worldwide redundancy programme.

Martin Gahbauer, Nationwide's senior economist, said: "Sharp falls in share prices, the rising cost of essential items and a weak exchange rate have combined to negatively impact consumer sentiment."

Confidence among consumers for spending on significant items such as a house or car fell to 13 per cent in January, down from 16 per cent in December and a marked difference from the 22 per cent of respondents who displayed such optimism a year ago.

Both the Nationwide and Halifax reported house price falls last month and predict at best prices to remain flat on average this year with falls in most of the country off-set by small price rises in London.

Nationwide forecasts the probability of a quarter-point cut in interest rates tomorrow as 80 per cent likely and gives a one in five chance of a half-point trim to rates.

Expectations of a cut in interest rates weighed on sterling as the pound fell to a two week low against the dollar, down to $1.96 from $1.9648 yesterday.

Nationwide said that its expectations index, which indicates sentiment about the economic situation in six months' time, also fell four points to 79 from 83 as fears over job losses rose.

Nationwide's findings were borne out by a separate survey from KPMG and the Recruitment and Employment Confederation that showed demand for staff rose at its weakest rate in 26 months during January. Pay rises for permanent staff weakened further to a 22-month low.

The survey is timed for publication to coincide with the meeting of the Bank of England Monetary Policy Committee and replicates the US Consumer Confidence Index, which is monitored by the US Federal Reserve.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive