Factory costs rise signals continued inflation

Published on Friday 11 September 2009 21:35

MANUFACTURERS have suffered their biggest rise in input costs in more than a year, a sign that inflationary pressures are persisting in the UK economy.

Producer input prices rose 2.2 per cent during August, official figures yesterday revealed. Much of the hike was due to a resurgent oil price – up 9.4 per cent on the month.

The rise was more than double the rate analysts forecast and the biggest monthly rise since June 2008. Input prices are still 7.5 per cent lower than in August last year, but the July number was 12.2 per cent down on the year.

Prices at the factory gate edged up by just 0.2 per cent, putting a fresh squeeze on the margins of manufacturers hit by recession.

The figures, from the Office for National Statistics, raise the possibility that next week's consumer inflation data could surprise on the upside, though analysts said producers seemed to be absorbing much of the recent rise in raw material costs.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said the output numbers were "modestly above expectations" though "unlikely to be of major concern" to Bank of England rate-setters.

"Despite the rise in producer prices in August, it still seems likely that consumer price inflation will resume its downward trend in August after sticking at 1.8 per cent in July," he added.

Richard McGuire, a strategist at RBC Capital Markets, said: "UK producers opted to absorb the unexpectedly sharp rise in costs, resulting in lower margins rather than higher pipeline price pressures."

Alongside oil prices, scrap metal costs also put pressure on manufacturers last month with a 4.1 per cent rise – the biggest monthly rise since March 2007.

Core output prices – stripping out volatile goods such as food, drink, tobacco, and petrol – rose 0.7 per cent, the biggest monthly rise since May.