Factory gate inflation heads higher on fuel costs

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The Independent Online

The ongoing spike in the oil price, plus higher food prices, saw factory gate inflation rise to its highest level for more than two years in February, official statistics revealed yesterday. The Office of National Statistics said producer price inflation hit 5.3 per cent in February.

The increase reflects a 14.6 per cent annual increase in the rawmaterials used by manufacturers, the ONS said, with fuel and food prices driving input inflation. That figure is likely to rise higher still, as February's petrol prices did not fully reflect the rise in the oil price caused by the conflict in Libya.

Factory gate inflation takes several months to feed through into the headline rate of consumer price inflation, suggesting that this is likely to remain well beyond the Bank of England's 2 per cent target – it is currently at 4 per cent – for months to come. That will add to the pressure on the Bank's Monetary Policy Committee to raise interest rates.

"Our assessment is that annual consumer price inflation will increase towards 4.5 per cent over the next few months," said David Kern, chief economist at the British Chambers of Commerce. "While there is virtually nothing the MPC can do in the short-term to prevent a temporary rise in inflation, there is a strong likelihood it will take action tore-establish its credibility."

However, Samuel Tombs, UK economist at Capital Economics, said there was some evidence that manufacturers were not passing on cost increases to customers. "Producers are having a little less success in passing on the rise in their input costs," he said.