Factory gate prices fall by 0.4 per cent

Hopes that inflation will continue to fall have been given a fresh boost after factory gate prices dropped at the fastest pace for more than three years in June.

The Office for National Statistics said prices charged by manufacturers fell 0.4 per cent between May and June amid falling oil costs - the biggest drop since November 2008.

And the prices manufacturers pay for goods fell 2.2 per cent in June, although this was slightly slower than the 2.6 per cent fall the previous month.

Howard Archer, chief economist at IHS Global Insight, said the figures fuelled hopes that inflation, which has already dropped to 2.8 per cent in May from 5.2 per cent in September, “will head down appreciably over the coming months”, easing the squeeze on consumers.

Factory gate prices are coming down as manufacturers react to lower input costs, according to Mr Archer.

He said: “The sharp retreat in oil prices and lower imported metals prices is easing the pressure on manufacturers’ margins and giving them increased scope to limit prices to win business.

“Meanwhile, the current weakness of the economy and muted manufacturing activity means that more companies feel the need to price competitively to try and gain, or even retain, business.”

Falls in inflation come as welcome news for the economy after years of soaring price rises, which saw consumers rein in spending - a major factor in the UK’s double-dip recession.

Earlier this week, the British Retail Consortium said overall shop price inflation slowed to 1.1 per cent in June from 1.5 per cent in May, its lowest level in two and a half years, while food inflation fell to 3.5 per cent from 4.3 per cent.

The slump was caused by crude oil prices falling by a quarter on three months ago, and food commodities such as coffee and sugar also descending sharply, it said.

A continued fall in inflation would give the Bank of England more freedom to roll out fresh emergency measures to stimulate the UK’s struggling economy.

The Bank announced yesterday that it would pump an additional £50 billion into the economy under its quantitative easing (QE) money printing programme. Without this, it warned, inflation was in danger of slipping below its 2 per cent target.

The latest bout of QE brings the programme up to £375bn, but some economists think it could eventually be expanded to £500bn.