Inflation fears after factory gate prices increase by over 5%

BANK of England rate-setters were facing an inflationary headache this weekend after official figures showed factory gate prices rising at their fastest pace in 18 months.

The 5.7 per cent increase was well above the 4.6 per cent rise forecast in the City and is sure to stoke fears of a longer-lasting spike in inflation.

It follows news last month that the annual rate of consumer price inflation had jumped to 3.4 per cent in March, from 3 per cent in February – well above the Bank's 2 per cent target.

The Bank's monetary policy committee – led by governor Mervyn King – is due to announce its latest move on interest rates and quantitative easing on Monday at the conclusion of a two-day meeting that was pushed back due to this week's general election.

Most economists expect the MPC to sit on its hands, though minutes for April's meeting – at which there was a 9-0 vote in favour of holding rates – showed that some policymakers had voiced concerns over stubbornly high inflation levels.

Yesterday's data from the Office for National Statistics highlighted the impact of higher oil costs on manufacturers. Economists said the rise in producer output prices also suggested that some firms were taking advantage of a recent recovery in activity to boost profit margins.

Jonathan Loynes, chief economist at Capital Economics, said: "The numbers clearly won't do much to ease the recent concerns amongst one or two MPC members that the current spike in (consumer] inflation may turn into something longer-lasting. But we see no reason to panic."

Royal Bank of Scotland economist Ross Walker described the headline rate of producer price inflation as an "ugly number".

He said: "It's another test of the Bank of England's very optimistic inflation projections. It's going to reinforce doubts that we see inflation falling back as far and as rapidly as the February Inflation Report forecast projected."

If interest rates are held, it will be the 14th successive month they have been frozen, providing some respite for businesses and homeowners.