Input price inflation reaches 7.2%

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INDUSTRY'S fuel and raw material costs are rising at their fastest rate in over three-and-a-half years, fuelling fears in the City that the Government is on course to breach its inflation target.

Fuel and raw material prices rose by 1.5 per cent between December and January, according to the Central Statistical Office. This took the annual rate of input price inflation to 7.2 per cent, the highest since May 1989 and up from 5.4 per cent in December.

The main reason for January's sharp rise was a 2.8 per cent jump in the price of raw materials for the food, drink and tobacco industries. This follows the devaluation of the 'green pound', the exchange rate used to calculate the sterling price of foods covered by the EC common agricultural policy.

The 10 per cent rise in input prices since Black Wednesday suggests that importers have passed on higher import prices to their customers, rather than absorbing them by accepting lower profits. Chris Dillow, of Nomura Research, said that, with labour costs almost flat, 'profit margins may well be expanding'.

But there is little sign yet that manufacturers have passed higher costs on to their customers. The annual rate of factory output price inflation was unchanged in January at 3.5 per cent. The introduction of new year price lists pushed output prices up by 0.8 per cent between December and January, the largest increase in more than 18 months.

Excluding volatile food, drink and tobacco prices, output prices rose by a seasonally adjusted 0.2 per cent in January, compared with a 0.1 per cent rise in December. The underlying measure of factory gate inflation on this basis rose to 2.7 per cent in January, the highest for five months and up from 2.4 per cent in December.

January's retail price inflation figure, due on Friday, is expected to reflect the impact of the green pound's devaluation through a rise in food prices in the shops. The City expects the retail price index - excluding mortgage interest rates - to have risen by 3.9 per cent in the year to January, up from 3.7 per cent a month earlier. This is within a whisker of the Chancellor's 4 per cent target ceiling for underlying inflation.

Headline retail price inflation is expected to drop to 2.3 per cent in January, from 2.6 per cent in December, reflecting falling mortgage rates.

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