Cost of raw materials leaps 30%: Government's inflation forecasts threatened by sharp price rises over a wide range of commodities

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THE GOVERNMENT'S inflation estimates could be thrown out by the relentless and little noticed surge in the prices of raw materials in recent months. Some manufacturers are already passing on their higher costs to the consumer.

Coffee, copper, rubber, aluminium, nickel, silver, cotton, wool and palm oil are all at least 30 per cent dearer than at the end of last summer.

According to the Bank of England, commodity prices excluding oil rose by over 12 per cent in the first quarter of 1994, and in March the index was over 7 per cent higher than a year earlier. In its latest Inflation Report, published on Wednesday, the Bank warned: 'The recent increases in non-oil commodity prices, if they continue, could lead to increases in retail prices in the future.'

Last week, copper for delivery in three months rose above dollars 2,100 a tonne for the first time in more than a year. And coffee futures went to a five-year high of over dollars 1,900 a tonne, making a rise of 62 per cent this year.

According to Angus Macmillan, head of research at the London Metal Exchange brokers Billiton Enthoven, part of Royal Dutch/Shell: 'The base metal markets bottomed out in the second half of 1993, and the cycle has turned. During the course of 1995, we will start to see the increases having an effect on the price of finished goods.'

The Bank of England report says that the price rises have reflected a number of supply shocks. 'Although the impact of these shocks is fading, a revival in world demand would tend to push up prices.'

The main cause of the raw material price surge is the ongoing strength of US demand, which has continued into this year and is being given fresh impetus from the recovering economies of the UK and continental Europe.

A spokesman for Lucas Industries said: 'We are noticing price pressures on aluminium for aerospace and automotive components, and steel castings and bars for the automotive industry. But there are mechanisms built into contracts to deal with these fluctuations.' The supply of soft commodities, particularly coffee and rubber, is also being hit by bad weather, labour shortages and planting of other crops.

Heavy rain has delayed deliveries of coffee from Brazil and Colombia. In January, Nestle increased the prices of its instant coffee by 12.5 per cent.

A Nestle spokesman said: 'We are monitoring the situation very closely. If the current situation prevails for some months - and I stress months - we would have to consider another price increase in the autumn.'

Malaysian rubber production has also been affected by rain, but plantation owners have reacted to long-depressed prices by planting cocoa and palm oil trees. And many of the labourers normally employed to tap rubber trees have migrated to the cities to find better-paid work.

Clive Drewett, director of purchasing and natural resources at Avon Tyres, part of Avon Rubber, said: 'It doesn't affect us yet, because we have bought our rubber far enough ahead. But there is a new smell about commodities: they are all moving up.'

Robert Chote, page 10

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