Factory gate inflation hits 16-year high

The rising cost of food and fuel drove the price of goods leaving Britain's factory gates to a 16-year high in November, raising doubts about a further easing of monetary policy over the coming year.

New figures from the Office for National Statistics, published yesterday, revealed that the annual output price inflation for all manufactured products touched 4.5 per cent, above forecasts of 4.3 per cent, and second only to the August 1991 record of 5.2 per cent. Month on month, factory gate prices were up 0.5 per cent, as the cost of raw materials rose 3.4 per cent mainly accounted for by the sharp rise in the oil price.

The report prompted some economists to reconsider their optimism over further cuts in 2008.

Trevor Williams, the chief economist at Lloyds TSB, said: "This is not great news. These are producer numbers, but it's becoming pretty clear that consumer prices will probably go higher as well. The Bank has just cut rates and it's hoping that the economy will slow down enough to offset inflationary pressures. That may happen but it may not. People who were calling for a cut to below 5 per cent can't possibly ask for that now. A cut of 25 to 50 basis points is more realistic."

Russell Silberstone, head of interest rates at Investec Asset Management, said he was still expecting the Bank to cut the base rate next year, albeit with more caution. "These numbers are clearly disappointing," he said. "But the big question is this: will growth slow enough? And the answer is, it still looks like it will. The housing market has slowed down and you have a fairly leveraged consumer out there. As far as the impact on consumers is concerned, they will feel pressure at the petrol pump and when they buy food. For Christmas, although there are clear pressures on producers, customers are more wary on the high street. Retailers will probably have to absorb some discounts to make a sale."

Meanwhile, a report published yesterday by the British Retail Consortium and the research group Nielsen revealed customer confidence in the run-up to the festive season to be much lower than last year, with consumers claiming their biggest concern is the outlook for the economy.

"Consumers will be thinking twice about splashing out this Christmas... it will be ever more important for retailers to offer real value to Christmas shoppers," said Mike Watkins, Nielsen's manager of retail services.