Factory-gate inflation knocks troubled pound

BY DIANE COYLE

Economics Correspondent

Factory-gate inflation rose for the sixth month running in April. Official figures for prices paid for materials and charged by industry helped knock the pound back below the level at which the Bank of England issued its base-rate warning last week.

The pound fell 2 pfennigs against the mark to DM2.26, and dropped to $1.56.

Its index against a basket of other currencies closed at 84.1, below the level at which the Bank warned that the Government would miss its inflation target unless base rates rose from their current 6.25 per cent.

The index was at 84.4 when Mervyn King, the Bank's chief economist, said base rates needed to rise "sooner rather than later".

Steven Bell, chief economist at Morgan Grenfell, said: "The base-rate decision will revolve around sterling at the next monetary meeting." Kenneth Clarke, the Chancellor, and Eddie George, Governor of the Bank of England, next meet on 7 June.

Prices charged at the factory gate rose 0.4 per cent last month, taking their 12-month rate of increase to 4.0 per cent. "Core" prices - excluding food, drink, tobacco and petrol - increased 4.1 per cent in the year to April.

There was also a bigger than expected 0.7 per cent jump in prices paid by producers for raw materials. Input-price inflation has stayed in double digits all year.

The Treasury said the figures pointed to slower inflation in the core factory-gate prices, because their advance in the latest three months was smaller than in the previous three. But City analysts said they were disappointing.

Raw-materials prices rose fastest in sectors that have either faced big increases in commodity prices - pulp and paper, chemical, and rubber and plastics.

There were also big increases in industries which import a high proportion of their inputs - such as metals and foods - due to the pound's weakness this year. Oil prices in sterling rose 8.3 per cent in April alone.

There were price rises in all main industry sectors, passed on to prices charged in all industries except electrical and optical equipment. Although there was some comfort in the fact that so little of the pressure on input prices has been passed on so far, most City economists expect factory- gate prices to pick up further in the next few months.

Survey evidence suggests that manufacturers' expectations of being able to pass on higher prices have now receded. But many are operating at high capacity, suggesting they will eventually pass on higher costs rather than accept lower profit margins.

Simon Briscoe of SG Warburg said: "Nobody is confident that the peak in producer price inflation is near." With the pound falling nearly 1 per cent against a basket of other currencies yesterday, reinforcing the concern about factory-gate prices, market attention remains focussed on the prospect of a base-rate rise after the next meeting between the Chancellor and Mr George. The minutes of their April meeting are published on Wednesday.

Neil MacKinnon, chief economist at Citibank, said: "International investors have no enthusiasm for sterling. It is a soft currency."

He predicted that sterling could fall further before the next monetary meeting. Steve Barrow, currency analyst at Chemical Bank, thought that the pound might not fall much more but would equally find it hard to trade much higher.