Factory gate inflation falls despite rise in oil and raw material prices

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Prices charged by British industry plunged at the sharpest rate for 14 years last month despite the recent surge in the oil price, official figures showed yesterday.

Prices charged by British industry plunged at the sharpest rate for 14 years last month despite the recent surge in the oil price, official figures showed yesterday.

The nation's manufacturers cut their prices in the face of another strong rise in the cost of raw materials.

Economists said the data would help interest rates stay on hold as it showed firms were unwilling or unable to pass on the impact of the rising cost of commodities such as oil.

The price of crude surged to a fresh 10-year high, as traders dismissed Sunday's deal by the producers' cartel, Opec, to increase output. On the London oil market, Brent for October delivery surged $1.32 (£0.93) to $34.10 a barrel by early evening while US Nymex crude was $2.09 higher to $35.72, the highest since the Gulf War in 1990.

But the price of goods leaving the factory gates fell 0.3 per cent in August, which was the steepest fall since 1986 and defied forecasts of a 0.2 per cent rise. The annual rate dipped to 2.5 per cent from 2.9 per cent in July. But the cost of raw materials and commodities rose four times as fast.

Stephen Radley, the chief economist at the Engineering Employers Federation, said: "With the oil price still strong I think margins will be squeezed a lot further. Unless something unexpected happens I can't see rates going up this year."

The cost of raw materials rose 0.6 per cent although the annual rate slowed to 10.7 per cent from its peak of 14.4 per cent in June. Oil prices were 54 per cent higher than a year ago - smaller than the rise in recent months because prices started to go up a year ago.

Jonathan Loynes, chief UK economist at Capital Economics, said the figures showed there was little sign of inflation in the economy: "The bottom line is that firms are taking the oil price rises largely on the chin," he said.

Other economists pointed to an increase in the "core" measure of output price inflation - which excludes volatile elements such as oil, food, and tobacco. This rose by 1.3 per cent on the year, the highest since August 1996.

James Carrick at ABN Amro said this meant that deflation in goods prices within the overall inflation picture may be ending. "We can, therefore, expect to see inflation drift above target next year."

According to the Office for National Statistics, which compiled the figures, there was a sharp fall in petrol-related products. Analysts said this reflected the recent supermarket petrol price war - a factor that may become irrelevant if the fuel protests continue.

Fraser Coutts, a UK economist at 4cast, an independent analysts firm, said there was little hope Opec's decision to produce an extra 800,000 barrels a day would engineer a sharp drop in the oil price.

"Oil prices were tending to rise towards the end of last month so next month's producer prices could be higher. Today's figures looks positive for interest rates but I think they are just a blip," he said.

The International Energy Agency, which monitors the oil market for Western economies, warned that the market was "fundamentally unbalanced".

Roger Priddle, its executive director said the market "clearly needs more oil". Its monthly oil market report, published yesterday, showed stocks were 165 million barrels lower than a year ago.

"The market is too fragile. It needs higher inventories to protect against circumstances such as an abnormally cold winter," it said. "Without adequate stock coverage, the market lumbers from one problem to another creating instability in its wake, and dragging prices ever higher."