Increase in raw material costs surprises City: Commodity prices soar as outlook brightens

BRITISH industry's raw material costs rose more sharply than expected last month, sounding a warning note on future inflation pressures, the Central Statistical Office said yesterday.

The 0.5 per cent increase in industry's material costs came as commodity prices surged yesterday, reflecting a sharp improvement in confidence over the world economic outlook. Copper prices stood at their highest in 14 months; zinc and tin traded at three-month highs; aluminium was quoted at a 22- month peak and nickel prices were the highest in 19 months.

Traders said prices were driven up by speculative buying by hedge funds and other liquid investors.

Concern over rising commodity prices is one reason the US Federal Reserve has raised interest rates since early February. The Fed is expected to lift rates again today, to allay fears over inflation.

CSO figures showed that the rise in British industry's raw material costs reflected higher crude oil prices. Last month's rise left costs only 1.5 per cent below 1993 levels, compared with a 3.3 per cent annual fall as recently as January.

Despite the bigger-than-expected increase in raw material costs, City optimism that factory gate prices are firmly under control remained high after a gentle 0.3 per cent increase in April. This left prices 2.2 per cent above a year earlier - the lowest annual increase since December 1986.

Excluding volatile prices for food, beverages, tobacco and petroleum, factory gate prices showed no change in April and were 2.2 per cent higher than a year earlier.

The Confederation of British Industry said high street sales in April rose more quickly than expected according to its latest distributive trades survey, published today.

Footwear, leather shops and clothing stores showed strong improvement. Off-licences showed the strongest year-on-year growth since July 1992 and confectionery sales also expanded strongly.

Furniture and carpet retailers reported firm sales growth after falls in the previous month. Sales of china and DIY goods were flat, durable goods sales edged slightly higher, while sales by chemists shrank sharply against a year ago.

The CBI said the high street recovery remained on course but April's improvement was below the annual growth rates reported in the second half of last year and sales for the time of year were below average.

(Graph omitted)

Hamish McRae, page 26