Costs and prices rose more slowly than expected but manufacturers expect costs in the next four months to pick up at the fastest pace for four years, with domestic and export prices set to rise at the sharpest rate in five years.
Andrew Buxton, chairman of the CBI's economic affairs committee, said competition meant cost pressures had not fed fully through into higher prices. "I have no doubt that at some point an interest-rate rise will be necessary but I do not think it is necessary now," he said.
Analysts in the City disagreed, seeing the survey as the latest evidence indicating that higher inflation is on the way unless base rates increase.
In spite of the export boom, the CBI survey shows that investment plans have fallen since the last survey in October. Mr Buxton said that the less buoyant investment outlook was puzzling and might reflect concern about the strength of demand over the coming year.
Employment during the last four months fell by less than expected. It was the smallest fall since industry started cutting jobs in October 1989, and companies expect almost no further job losses over the next four months.
Business confidence rose for the ninth consecutive survey and optimism over export prospects for the coming year was at its highest level since 1989.
In the City's opinion, the survey results put intense pressure on the Governor of the Bank of England and the Chancellor to raise base rates again after their next policy meeting on 2 February. The minutes of previous meetings show that they have regarded price expectations in the CBI survey as one of the most important indicators of inflation trends.
The survey is also included in the Bank of England's quarterly inflation report. The next will be published on 8 February, with an on-the-record briefing by Bank officials to avoid a repetition of the confusion sown in financial markets by differing accounts after an off-the-record briefing last November.
David Hillier, an economist at NatWest Markets, said: "Firms are clearly reacting to the pressure of demand by raising prices." Ciaran Barr, an economist at merchant bank Morgan Grenfell, said: "The credibility of policy will be weakened without an increase in interest rates. The authorities will have to satisfy the markets."
The financial markets' growing confidence that they will get this satisfaction boosted the pound yesterday. It closed up at 1.5965 dollars and 2.4145 marks. Shares and gilts rose modestly.
The dollar was subdued as US financial markets awaited President Bill Clinton's State of the Union address. Although the speech was expected to be short on detail, traders were looking for clues about tax plans. Robin Marshall, chief economist at Chase Manhattan bank, said: "There is a danger of a bidding war on tax cuts between the President and the Republican Congress which would increase the budget deficit."