Price rise fears and VAT hike spark warnings of inflation

• The Bank of England is struggling to keep a lid on inflation. Picture: Getty

While demand for UK-made goods has shown signs of recovery in recent weeks, the CBI yesterday warned that more companies will be forced to pass on some or all of their rising costs in the coming months.

Bank of England (BoE) policy-makers are struggling to keep a lid on inflation, with figures earlier this week confirming another rise further above the central bank's 2 per cent target, to 3.2 per cent in October.

January's planned VAT hike is likely to compound the misery for millions of businesses and consumers, pushing up the price of most products and services.

Raising the sales tax from 17.5 per cent to 20 per cent is also set to reduce gross domestic product (GDP) by 0.3 per cent next year, according to the independent Office for Budget Responsibility (OBR).

Howard Archer, chief UK economist at forecasting group IHS Global Insight, described the CBI's latest industrial trends survey as a "mixed bag".

He noted that order books had strengthened but said there was some "worrying news on the inflation front" for the BoE.

"The balance of manufacturers expecting to raise their domestic prices spiked up to an eight-month high," said Archer. "This reflects companies' needs to try to pass on at least some of their higher input costs resulting from increased commodity and oil prices. It will reinforce the belief that inflation is headed higher in the near term."

The BoE's quarterly inflation forecast, published last week, warned of further price rises in the short term.

Despite those pressures, policymakers have left the door open to further quantitative easing as they battle to avoid Britain suffering a double-dip recession.

The CBI survey's total order book balance rose to -15 this month from -28 in October, above expectations for a reading of -24.

However, firms' expectations for output in the coming three months were more subdued, with the balance falling to +4 in November from +18 a month earlier, the lowest since January.

Some 440 businesses responded to the survey, conducted between 25 October and 10 November.

CBI chief economic adviser Ian McCafferty said: "Manufacturing demand improved in November, following October's more negative figures for total and export orders.

"Demand is now back in line with that over the summer months, suggesting that particularly weak order book readings last month may have been a one-off."

But he added: "Inflationary pressures are a concern, with companies saying they will be increasingly forced to pass on at least part of their rising costs in the form of higher prices."

Oil and fuel costs remain a core source of inflationary pressure.Between the CBI's October and November reports, the average price of a barrel of crude rose by almost $5 to just under $86.

Chancellor George Osborne is to increase VAT on 4 January in a move he expects to generate an additional 13 billion a year.

But fears that the move would damage the economic recovery were fuelled yesterday when the OBR released its view of the rise.

The tax and spending watchdog said its analysis of the overall impact of the June Budget - in which the VAT hike was announced - had assumed a 0.3 per cent fall in GDP as a result of the higher sales tax. The disclosure led to renewed demands for Osborne to re-think the VAT rise.

Tom Clougherty, executive director of the right-leaning Adam Smith Institute, said: "Tax rises are the last thing we need while the economy remains so fragile."