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

Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
David Moyes and Louis van Gaal
Former Governor of Alaska Sarah Palin, left, with her daughter, Bristol
newsShe's 'proud' of eldest daughter, who 'punched host in the face'
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
A cabin crew member photographed the devastation after one flight
Life and Style
Carol O'Brien, whose son Rob suffered many years of depression
healthOne mother's story of how London charity Maytree helped her son with his depression
Life and Style
food + drink
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Rob Merrick's Lobby Journalists were playing Ed Balls' Labour Party MPs. The match is an annual event which takes place ahead of the opening of the party conference
newsRob Merrick insistes 'Ed will be hurting much more than me'
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Life and Style
healthFor Pure-O OCD sufferers this is a reality they live in
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Sexual health charities have campaigned for the kits to be regulated
healthAmerican woman who did tells parents there is 'nothing to be afraid of'
Life and Style
Arts and Entertainment
The John Peel Lecture has previously been given by Pete Townshend of The Who, Billy Bragg and Charlotte Church
musicGodfather of punk will speak on 'free music in a capitalist society'
peopleAt least it's for a worthwhile cause
Shoppers in Covent Garden, London, celebrate after they were the first to buy the iPhone 6, released yesterday
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments