Double-digit rise in factory gate prices for first time in 20 years

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The Independent Online

Factory gate inflation broke into double digits last month, for the first time since current records began more than two decades ago.

Manufacturing output prices rose by a record 10 per cent in the year to the end of June, driven by a rise of more than 30 per cent in the price of raw materials and other input costs.

The sharp rise in the price of crude oil, which has been closing in on $150 a barrel over the past few weeks, was the main contributor. However, the price of soft commodities, such as soy and wheat, has also risen sharply over the past few months.

The data will pile yet further pressure on the Bank of England, which has already seen consumer price inflation drift more than 1 percentage point above its 2 per cent target. The CPI hit 3.3 per cent in May, and June's data, which is due to be published this morning, is expected to reveal a further rise to 3.6 per cent.

Nevertheless, the Bank of England's Governor, Mervyn King, said that there was unlikely to be any increases in interest rates to calm inflation in the near-term, claiming that the risks to the wider economy were too great.

Economists and politicians are split over whether rates should fall or rise. The Liberal Democrat Treasury spokesman, Vince Cable, said yesterday that the latest figures meant it was now highly likely that the next move in interest rates would be up rather than down. "Double-digit inflation involves crossing a very dangerous psychological threshold," he said. "It means peoples' expectations of future inflation will be much bigger, and sets in train the very damaging spiral of escalating prices and costs we experienced in the 1970s and late 1980s."

However, Howard Archer, the chief UK economist at Global Insight, said he believed rates were more likely to stay steady. "We expect the ultimate next move in interest rates to be down, but this may very well be delayed until 2009 by elevated inflation levelsand risks."

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