Fears that the Bank of England may be left hamstrung by persistent inflation over its scope to stave off a downturn in the economy were fuelled today by more signs of faltering growth coupled with rising price pressures.

In the latest symptom of weakening conditions in crucial sectors of the economy, a key CBI survey suggested that high street sales fell in February for the first time in more than a year, while official figures showed that business investment spending dropped in the final quarter of last year.

Yet the Bank’s room for manoeuvre to respond to a slowdown with further cuts in interest rates was thrown into further doubt as the CBI’s figures also showed retailers pushing through the steepest price increases at the shops for more than a decade,

The threat that the Bank’s Monetary Policy Committee may be left boxed in, and forced to allow the economy to slow very sharply in order to cap inflation pressures was emphasised today by Rachel Lomax, its Deputy Governor.

Ms Lomax highlighted the danger that the MPC will be left with “less scope to respond to slowing demand - the risk posed by the current turmoil in financial markets”.

In a speech to the Institute of Economic Affairs annual conference, the Deputy Governor said that the Bank had to “balance two significant risks”.

“First, that financial stress will precipitate an unduly sharp slowdown of demand. And second, that temporarily high inflation will lead to inflation expectations persisting at too high a level,” she said.

The dilemma facing the MPC was sharpened still further today by the CBI’s snapshot of high street activity.

In bleak findings that suggested that strong January sales shown by official data may have been a “last gasp” from struggling consumers, the CBI’s main gauge of the proportion of retailers reporting rising sales fell to a February reading of minus 3. This, the first negative result since November 2006, sharply down from January’s figure of plus 4 and far below the long-term average of plus 18.

More than a third of retailers said that their sales volumes dropped this month, compared with a year ago. Sales in sectors affected by the faltering housing market were worst hit, with the gauge of sales for durable household goods tumbling to minus 70, and that or furniture and carpets dropping to minus 24.

Yet in an ominous sign for the MPC, the CBI also reported that its quarterly barometer of retail groups’ pricing intentions soared to a reading of plus 48 - the highest since November 1996.

Economists said that this figure was consistent with steep increases in goods price inflation at the shops, and sounded warnings that it could be a symptom of strong upward pressure on prices triggered by rising import bills as a result of recent steep falls in the pound.

The quandary for the Bank over how to respond to the conflicting pressures that the MPC now confronts was further intensified by today’s disappointing official figures for business investment.

Overall investment spending by companies sunk by 0.5 per cent in the final quarter of last year (Q4), leaving it up by 1.7 per cent from a year earlier.

Investment by construction companies plunged by more than 10 per cent, while in the vital services sector it rose by a meagre 0.1 per cent. In the retail and wholesale industries it dropped by 0.9 per cent. Only manufacturing groups were still prepared to keep investing for the future, with spending by industrial companies up by 1.6 per cent.

The Bank’s anxieties over rising expectations of future inflation among businesses and household, which could lead companies to raise prices and workers to demand higher wages, will be reinforced meanwhile by a survey today for Citigroup by YouGov, the polling firm.

The average expected level of inflation over the next 12 months among those questioned in the poll remained stuck far above the MPC’s 2 per cent inflation target, at 3.1 per cent this month, Citigroup reported. This was modestly down from the 3.3 per cent result for last month, but that marked a record since the YouGov survey began in late 2005. Results of the Bank’s own qiuarterly poll of inflation expectations are due shortly.

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