Inflation shock at factory gates

Factory gate inflation hit a four-year high in July and the annual rate of increase in costs paid by manufacturers for fuel and raw materials remained in double figures.

The figures, much worse than expected, revived fears that the Bank of England will get its way on higher interest rates, particularly if Thursday's release of retail price inflation shows a further jump.

The news hit bond and equity markets, with the September gilt future closing over a point down and the FT-SE 100 index ending 26 points off at 3,441.4.

The revelation of the scale and persistence of cost pressures in the manufacturing sector led to a hasty reappraisal of prospects for interest rates. The short sterling future, used to speculate on interest rate changes, ended the day indicating a rate of 7.09 per cent in December compared with its Friday close of 6.92 per cent.

Geoffrey Dicks, UK economist at NatWest Markets, said that the numbers offered no comfort for retail prices in the coming months. The market consensus is that the headline rate will rise to 3.7 per cent and the underlying rate, which is targeted by the Government, will increase to 3 per cent.

Factory gate inflation increased from 4.2 to 4.5 per cent, the highest since July 1991 and more than double its low of 1.9 per cent a year ago. Inflation in the pulp, paper and paper products industries led the way, increasing by no less than 21 per cent over the year.

The core rate, which excludes food, beverages, tobacco and petroleum products, rose to 5 per cent, its highest since May 1991. Worse still, the rise in the latest three months over the previous three was equivalent to an annual rate of 5.3 per cent - up from 4.9 per cent.

Core output prices rose by 0.4 per cent in July, and June's figure was revised up to a similar rate, one that manufacturers have now been able to push through every month since March. There was no better news on the costs of raw materials and fuels facing manufacturers. Input price inflation which had been expected to fall to about 9 per cent came in at 10.3 per cent. This was partly because of a higher than anticipated month on month rate at 0.5 per cent and also because of upward revisions to previous estimates for May and June.

The fall in commodity prices in recent prices was offset by sterling's slide earlier in the year. Crude oil prices dropped sharply but imported materials, particularly paper and paperboard cost more.

Despite the setback, the City is still confident that the pressure from rising input prices should ease soon. Roger Bootle, chief economist at HSBC Markets, said: "We still feel there ought to be a sharp drop over the next few months."

However, the persistence of high input price inflation, which has now disappointed for at least two months, suggests that the pressure on retail prices from higher prices charged by manufacturers will not ease rapidly. Ciarn Barr, UK economist at Deutsche Morgan Grenfell, commented that although output price inflation was probably at its peak, a sharp decline is most unlikely.

This view was echoed by Kevin Darlington of ABN Amro who predicted that output price inflation would continue to run at 4-5 per cent. While input prices - which account for a quarter of manufacturers' costs - might be past their peak, unit wage inflation - accounting for a half of costs - was now rising. The overall position in manufacturing was unlikely to ease sharply and these pressures would continue to be passed through to the retail sector.

Attention now switches to Thursday's release of the July retail price figures. Even before yesterday's producer price figures, the market was expecting higher rates both of headline and underlying inflation.

Comment, page 15

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Arts and Entertainment
Larry David and Rosie Perez in ‘Fish in the Dark’
theatreReview: Had Fish in the Dark been penned by a civilian it would have barely got a reading, let alone £10m advance sales
News
Details of the self-cleaning coating were published last night in the journal Science
science
News
Approved Food sell products past their sell-by dates at discounted prices
i100
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable