Oil cost surge adds fuel to inflation rise fears

FACTORY gate prices rose at their fastest pace in 16 months in March, reigniting fears over inflation. Fuelled by a surge in the cost of oil, the price of goods leaving UK factories rose 0.9 per cent last month – more than twice the consensus forecast by City analysts.

That made for an annual rise of 5 per cent – the highest since November 2008. Howard Archer, chief UK economist with IHS Global Insight, said: "The producer price data may well lift speculation that interest rates could rise well before the end of the year."

Sterling rose to a seven-week high against the euro and a six-week high against the dollar following the data as markets questioned whether interest rates would now stay at record lows of 0.5 per cent for as long as they had previously expected.

However, some in the City said it was unlikely the Bank of England's monetary policy committee would over-react to the strong factory gate figures. David Tinsley, at NabCapital, said: "The MPC will not dismiss these numbers entirely, as they are very strong. But I don't think their stance on rates will change."

He said the MPC was still forecasting that consumer price inflation would be below its target of 2 per cent by later this year due to the slack in the economy. CPI is currently a full percentage point above that target.

The rise in factory gate prices was led by petroleum products, which added more than two percentage points to the annual rate. Even excluding the direct effect of oil prices, producer price inflation showed a marked rise.

Core producer output price inflation – which strips out food, beverages, tobacco and petroleum products – rose by an annual 3.6 per cent last month, its highest rate since February 2009. There was also a sharper-than-expected jump in input price inflation, covering items such as raw materials.

That jumped 10.1 per cent on the year, up from 7.5 per cent in February and the biggest annual jump since October 2008. Higher crude oil prices accounted for about 95 per cent of that annual rise.

On the month, crude oil prices rose 9.7 per cent and imported metals were up 5.3 per cent. A barrel of oil has doubled in dollar terms over the past year. Brent crude hit a 17-month high, above $86 a barrel, this week.