Industry still growing, but slower - and prices soar at record pace

Britain's resurgent manufacturing sector continued to expand last month but at a weaker-than-expected pace while firms ramped up prices at a record rate, stoking inflation fears.

Analysts said manufacturing activity may have peaked after the latest Markit/Cips purchasing managers' index for the sector fell to a five-month low of 57.1 in March from a downwardly revised 60.9 in February.

A reading of more than 50 indicates growth.

However, analysts had expected a more modest easing last month to 60.6.

Yesterday's report revealed that manufacturers were raising their prices at the fastest rate since they were first recorded in 1999 as they passed on the soaring cost of commodities such as oil, cotton and timber to their customers.

The rise in the output prices index to 65.2 from 63.6 in February highlights the dilemma facing Bank of England policymakers over how to tackle persistently sticky inflation without harming a fragile economic recovery.

The slowdown in manufacturing growth is likely to reinforce expectations that the central bank's monetary policy committee will hold off raising interest rates until the recovery is on a firmer footing.

Money markets have pushed back expectations for a hike in rates to August from May, largely as a result of weak news on consumer activity.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said: "It seems somewhat churlish to call this a disappointing survey as it still shows very decent manufacturing growth in March.

"Nevertheless, there are signs that manufacturing activity has peaked and will be more modest over the coming months."

He added: "The survey contains more bad news for the Bank of England on the inflation front, with output prices climbing at the fastest rate in the series' history."

CEBR economist Scott Corfe said the manufacturing sector would continue to show "solid export-led growth" over the next four years, boosted by a relatively weak pound and the general recovery in world trade.

However, the pace of growth is likely to moderate over the coming months, he added.

The easing in manufacturing activity in March was driven by the weakest expansion in new orders in five months, although export orders growth stayed within sight of February's series high. Markit said the slowdown in demand was most pronounced in the consumer goods sector, which was virtually stagnant.

Encouragingly, companies continued to take on new staff, though not at February's record pace.

The manufacturing sector has recorded strong growth over the past year but it accounts for only about an eighth of total economic output.

David Noble, chief executive of Cips, said: "Hopes that the UK economy might start to rebalance towards manufacturing seem to be withering on the vine."

A purchasing managers' index for Britain's crucial services sector, which accounts for almost three-quarters of the economy, is due to be released on Tuesday.