Producer input price drop biggest in two years

The prices paid by UK manufacturers posted the biggest drop in more than two years in August, official figures yesterday revealed, as a period of high inflation for the sector appeared to pass its peak.

Producer input prices fell 1.9 per cent last month, compared to a 0.5 per cent increase in July, while prices charged by manufacturers to their customers slowed, increasing just 0.1 per cent, compared to a 0.3 per cent boost the previous month.

The reduction in input prices was driven by a 5.9 per cent dive in crude oil costs, fuelled by fears that the global economy is heading back into recession, while weak demand squeezed manufacturers’ pricing power.

The slowdown will ease pressure on the Bank of England to curb the high rate of consumer prices index inflation, weakening the chance of an interest rate hike and increasing the likelihood of a further cash injection into the Bank’s quantitative easing programme.

Samuel Tombs, UK economist at Capital Economics, said: “August’s producer prices figures provide the strongest indication yet that cost pressures in the industrial sector have peaked.”

He added: “Barring a renewed surge in oil prices, input price inflation should fall rapidly over the coming months and be back down to single-digits by the end of the year.”

The slight rise in output prices was driven by a boost to the price of chemical and pharmaceutical products, the Office for National Statistics said.

The improved outlook for price inflation will be a welcome relief for the Bank’s monetary policy committee, which is hoping that the cost of living will start falling throughout next year and in to 2013.

The monetary policy debate has shifted focus away from interest rates and back to quantitative easing – effectively money printing – as the need for emergency support to jump-start the recovery becomes more apparent.