Companies take the punishment from rising input prices

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The Independent Online

Factory input prices rose at their fastest pace in eight months during January but companies did not appear to be passing the costs on to customers, making an early rise in interest rates less likely.

Prices paid by manufacturers for raw materials rose 0.6 per cent last month, the strongest rise since May, while output prices were up only 0.1 per cent. On an annual view, input prices fell some 6.2 per cent, while prices charged at the factory gate were off only 0.5 per cent.

Economists said that the near-absence of inflationary pressure in the early part of the supply chain meant the Bank of England was unlikely to rush into raising interest rates from their present 37-year-low of 4.0 per cent. The Bank's Monetary Policy Committee meets again in the first week of next month.

The main upward pressure on raw material costs came from a jump in the price of crude oil. But manufacturers appeared to be enjoying pricing power in the sale of food, tobacco, and printed and recorded media.

John Butler, a UK economist at HSBC, said the data would eventually be reflected in the retail price index. "Cost pressures have moderated considerably over the past year," he said. "Over the past 12 years, every turning point in producer price inflation is reflected, with varying lags, in a turning point in retail goods prices."

Separately, there was fresh evidence of booming demand on the high street, with the British Retail Consortium and KPMG reporting underlying annual growth in retail sales of 6.0 per cent in January. Total sales growth was 8.3 per cent year on year in January, up from December's rate of 8.1 per cent. On a three-month basis, the underlying rate of growth remains steady at 5.9 per cent.

The BRC said January this year had seen fewer items go on sale, although hefty discounting had bolstered demand for household goods. Sales of wines and spirits were likewise booming.

Bill Moyes, the BRC's director-general, said the sales growth was not inflationary. "If [retail growth] is damaged by any increase in interest rates, the effect will be felt throughout every sector."

The Bank of England is tomorrow expected to indicate that inflation in the UK will this year fall below the Treasury's 2.5 per cent target when it publishes its quarterly Inflation Report.