Cheaper oil masks 0.8% rise in prices at factory gate

Industry saw the first fruits of the deal by Opec to end its production quotas as the drop in the oil price sent the cost of raw materials plunging at the fastest rate on record.

Input costs for UK factories fell 3.2 per cent in April, the largest monthly fall since records began in 1986. Crude oil fell 3.0 per cent, leaving it 18.5 per cent lower than a year ago.

But the dramatic fall masked a worrying rise in underlying factory costs - excluding volatile elements such as oil, food, drink and tobacco. On this measure, the cost of goods leaving the factory gate rose 0.8 per cent in the year to April, the highest rate since December 1996. Input costs were up 2.4 per cent - the largest rise since December 1995.

At a headline level, the cost of finished goods rose 0.5 per cent on the month, up 2.2 percent on the year, and higher than analysts expected. The rise was driven by higher prices for petrol, alcohol and tobacco, which were pushed up by higher excise duties in the Budget.

The Office for National Statistics said if all the Budget tax hikes were passed on it would have added 0.5 per cent to the index. Excluding excise duties, output prices fell 0.1 per cent on the month, the first drop for 16 months.

Economists said the figures would give further support to those on the Monetary Policy Committee who has voted last week to keep interest rates on hold. They said the main concern over inflation came from the services economy rather than the factory floor.

Dharshini David, of HSBC, said: "The numbers provide modest support for the doves' case in the interest rate debate." Ian Stewart, of Merrill Lynch, said: "The key to rates is the domestic economy and the exchange rate. The domestic economy is going to remain reasonably robust in the coming weeks."

James Carrick, of ABN Amro, said the drop in input prices had relieved the pressure on manufacturers who were unable to pass on double-digit rises in input prices on to customers.

"Furthermore, sterling's strength is preventing domestic manufacturers from raising their prices by reducing the cost of imported goods," he said. "This highlights the dilemma for the MPC ... as it masks inflationary pressures that are building in the service sector."