Busy factories alarm markets: Anxiety for inflation as manufacturers report surge in prices and output

SHARES and gilts dropped sharply yesterday on evidence from a leaked report that factory output is surging and that manufacturers are raising their prices because of raw material shortages.

The latest Purchasing Managers' Index from the Chartered Institute of Purchasing and Supply shows manufacturers' prices rising sharply. City economists said this backed up the last survey of manufacturers by the Confederation of British Industry, which also showed a sharp rise in prices.

The survey's omens on inflation pushed gilts down further against a backdrop of already weak world bond prices, although trading was thin. On the stock market, the FT- SE index of 100 leading London shares closed 27.1 points down on Wednesday's close at 2,919.2.

But the Chancellor will have taken comfort from the Organisation for Economic Co-operation and Development's latest World Economic Outlook, which forecasts that the British economy will grow by 2.8 per cent this year and 3.2 per cent in 1995 - fractionally more optimistic than the Chancellor's recent summer forecast.

The Purchasing Managers' Index pointed to strong rises in factory output, employment and new orders, with the domestic and export markets doing better than last month. Suppliers also reported that they were lengthening delivery times because of their inability to meet demand, while stocks of finished goods fell.

This upbeat message was mirrored by Infolink's latest consumer credit survey, which showed that tax increases did not appear to have had a dramatic impact on consumers' willingness to take on debt. Applications for retail credit were nearly 10 per cent higher in May than a year earlier.

Similarly, Dun & Bradstreet reported that the number of business failures was 15 per cent lower in the first half of 1994 than in the same period a year earlier.

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