Factory price rises at two-year high as oil price soars

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A RECORD surge in the price of crude oil fed through to industry last month, sending prices of goods leaving UK factories rising at their fastest rate for two years.

Output prices rose 0.1 per cent in August, leaving them 1.3 per cent higher than a year ago. Input prices rose 0.1 per cent (annual 3.7 per cent), the biggest rise since December 1995.

But the City gave the data a cautious welcome, saying the rises were chiefly down to a record 70.9 per cent annual rise in the oil price, which has surged from $10 a barrel at the end of 1998 to a 33-month high of $23 today.

They pointed to the gulf between the annual rise in overall input inflation with a 3.2 per cent fall in core inflation (which excludes food, drink, tobacco and oil). "Higher oil prices don't seem to have done a lot of damage. These numbers do not present a problem," said Robert Barrie, an economist at CSFB.

The figures confirm that the three-year period of input price deflation ended in July. Raw material costs make up one-third of input costs and the rise in the oil price is one of the largest components.

Richard Iley, an economist with ABN Amro, said factory gate prices would not fall further and the Bank of England's forecast last month for inflation to fall below 2 per cent now looked increasingly unlikely. "This was likely to have been an important factor in the Bank's surprise decision to raise interest rates last week," he said.

Economists anxiously await the release today of inflation data which are forecast to show a rise to 2.3 per cent from 2.2 per cent. Worries that the Bank will raise rates again sent the yield on the benchmark 10- year bond to a 13-month high of 5.60 per cent.

Currency markets were dominated by the yen, which surged to a high against the euro and a three-year peak against the dollar. A growing belief that Japan's economy is on the mend after last week's unexpectedly strong GDP figures pushed the euro below 110 yen for the first time.