Rising prices add to BoE pressure over inflation

RISING raw material costs for manufacturers yesterday added to pressures faced by the Bank of England which is struggling to keep inflation under control.

With prices continuing to rise, it will weaken the argument for pumping more money into the economy.

Economists and business leaders have called for an expansion of the quantitative easing programme to provide greater access to cash. But new figures showed a sharp rise in manufacturers' raw material costs and factory gate inflation slowed less than expected.

Economists bet on the stubborn inflation pressures lessening the likelihood the bank would adopt any further monetary easing in the near term to shore up the economic recovery.

Meanwhile, poor job figures from the US made another round of QE more likely. Employers shed 95,000 posts last month. It means the jobless rate has been at 9.5 per cent or above for 14 straight months - the longest stretch since the 1930s.

The dreary US jobs data has raised expectations that the US Federal Reserve will take further action soon to prop up the economy.

Many analysts expect the Fed to decide at its meeting next month to buy government debt in an effort to lower interest rates and spur more borrowing.

As the US and UK central banks faced the questions of if and when to press the button on further money printing, the Japanese Cabinet approved a 5.05 trillion (38 billion) stimulus package aimed at boosting the country's flagging economic recovery.

The package, to be submitted this month to parliament for approval, follows 915bn in measures that prime minister Naoto Kan's government has already approved. Markets were largely unmoved by yesterday's developments.

The UK producer price data, issued by the Office for National Statistics (ONS), will disappoint Bank of England policymakers at a time when consumer price inflation is running more than a full percentage point above the bank's 2 per cent target.

Producer input prices rose 0.7 per cent on the month in September, almost double analysts' expectations, and raising the annual rate to 9.5 per cent from 8.7 per cent in August. It marks the biggest monthly rise in the annual rate since April. Output price inflation eased for a fifth consecutive month to 4.4 per cent year-on-year from 4.7 per cent in August. But the decline was smaller than expected.

Howard Archer, chief economist at IHS Global Insight, the forecasting and analysis specialist, said: "At the margin, the producer price data make the [Bank of England's] monetary policy committee more reluctant to revive quantitative easing in the near term at least, although the key factor on this will be just how much growth slows and how tight credit conditions remain."

That view was echoed by Investec's Philip Shaw, who said the ONS figures "may have a part to play, albeit a modest one, in assessing whether the MPC provides more quantitative easing in due course".

The stubbornly resilient inflation rate has forced Bank of England governor Mervyn King to write several letters of explanation to the government.

Yet the central bank is convinced that high inflation is largely due to temporary factors and will fall back over the course of the next two years.

In the US, a wave of government layoffs in September outpaced weak hiring in the private sector, pushing down America's payrolls.

John Velis, head of capital markets at Russell Investments, said: "We still think data like this auger for some additional stimulus measures from the Fed not too far down the road. An unemployment rate of 9.6 per cent will not be considered acceptable."