Rising factory costs add to inflation woes for economy

Inflation concerns have intensified after Britain's manufacturers suffered a record hike in input costs last month.

The impact of higher manufacturing costs may hit consumers. Picture: John Devlin

Intensifying price pressures saw average purchase prices jumping at the steepest rate in the Markit/Cips UK manufacturing purchasing managers’ index’s 25-year history on the back of rising commodity prices and the weaker pound.

Efforts to pass on some of the rising costs led to a sharp rise in selling prices, the survey showed, with output charges rising at nearly the fastest pace on record.

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But the industry was still able to notch up output growth during January, with the headline activity index registering 55.9, lower than 56.1 in December, but in line with economists’ expectations. Any reading above 50 denotes growth.

Domestic orders were a driving force behind January’s solid output, though the effects of a weaker pound on exports was starting to wane. Growth from new business abroad “slowed sharply” compared with the previous month.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “This emphatically shows that the benefits to manufacturers from sterling’s depreciation remain far too modest to outweigh the costs for the rest of the economy in terms of high inflation.”

Mike Thornton, head of manufacturing at accountancy and advisory firm RSM, said: “The latest manufacturing PMI highlights an optimistic start to 2017 – new orders are up, output has increased and employment levels remain strong, despite market uncertainty and increasing input costs.

“The statistics reveal that manufacturers are passing on the input costs as output costs rose sharply, which is positive news. However, it will be interesting to see when consumers start to feel the pinch. The consumer prices index is slowly creeping up, and many will have already noticed an upward change in petrol prices, but the real impact is yet to be felt which will have a profound impact on the UK economy.”

Rob Dobson, senior economist at IHS Markit, which compiles the report, said the real question now is whether pressure from cost inflation will drag on manufacturing growth in the months ahead. However, he noted that companies seem “fairly sanguine” on the issue, given that optimism among businesses is at an eight-month high.

Meanwhile, the CBI SME trends survey shows that new orders among small and medium-sized manufacturers grew at the fastest pace in two years.