Surprise slowdown in factory price growth eases Bank's inflation fears

The rate of factory-gate inflation slowed unexpectedly last month, providing some comfort for central Bank of England policymakers worried about runaway prices.

• Prices of goods leaving factories increased less than expected in November Picture: PA

The Office for National Statistics (ONS) yesterday revealed that output price growth for manufactured goods slowed to 3.9 per cent from 4 per cent in October. Economists had been forecasting an increase to 4.1 per cent. The easing was down to a smaller year-on-year increase in petroleum prices, the ONS noted.

The figures will provide relief to the Bank of England, which has been surprised by stubbornly high inflation in recent months, leading to calls from one policymaker to raise interest rates.

Last month, consumer price inflation increased to 3.2 per cent, still well above the BoE's 2 per cent target. Figures next week are expected to show it unchanged this month, having touched a 17-month high of 3.7 per cent in April.

The central bank's monetary policy committee believes the rate of inflation will increase towards the end of the year and is not likely to ease back until late next year.

Howard Archer, chief UK and European economist at IHS Global Insight, the forecasting group, said: "Producer output prices rose modestly less than expected in November, providing some welcome if limited better news on the inflation front for the Bank of England.

"The data supports the view that the Bank is likely to keep interest rates down at 0.5 per cent until at least the final months of 2011. Nevertheless, the suspicion remains that the Bank will be reluctant to re-engage in quantitative easing unless there is a very sharp slowdown in economic activity in the early months of 2011."

Philip Shaw, an economist at Investec, added: "It could be a sign that factory gate inflation is past its peak, which would at least be helpful for goods price inflation at the CPI (consumer prices index] level if that trend were to be maintained."

There was no input price data available yesterday as the ONS delayed publication until next week, citing potential errors.

Before the data, economists had broadly expected that a rise in oil and other commodity prices would push up annual producer output price inflation over the past month.

While the ONS said the easing in the headline number was due to a slower rate of increase in petrol prices than last year, petroleum products were the biggest single contributor to output price inflation, up 9.8 per cent on the year. However, core producer price inflation - excluding oil, food and tobacco - picked up to 3.3 per cent last month from a downwardly revised 3.2 per cent in October, but was also below forecasts for a rise to 3.5 per cent.

Brian Hilliard, economist at Socite Gnrale, said: "What surprises me is the muted state of output price inflation given the clear improvement in manufacturing demand. I don't think there are any adverse implications for CPI inflation - quite the reverse."