Factory gate inflation remains subdued

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The Independent Online

Fears that a recovery in manufacturing will stimulate inflation have faded after official figures showed companies were unable to raise prices in June.

Fears that a recovery in manufacturing will stimulate inflation have faded after official figures showed companies were unable to raise prices in June.

The prices of goods leaving factory gates held steady last month and are at the same level as a year ago, National Statistics said yesterday. There was contrasting news from the financial sector, which enjoyed an unexpectedly sharp rebound from its post-11 September slip, the CBI said.

The two surveys highlight the continuing imbalance between the financial and industrial sectors and will give little help to the Bank of England ahead of its interest rate decision next month.

The industrial prices data showed that the cost of raw materials dropped by almost 1 per cent between May and June, taking the annual fall to 7.2 per cent. However the figures masked the sharpest rise in core input costs – stripping out volatile items such as oil – since April 2001.

John Butler, UK economist at HSBC, said the issue for monetary policy was whether companies would be able to hike their prices when their cost bill starts to rise again. "The evidence as yet suggests not," he said. "That is good news for the inflation outlook but not necessarily good news for manufacturers." Figures tomorrow are expected to show that manufacturing output rose for the second month running in May.

Separately, a CBI survey showed that the financial services sector had unexpectedly recovered in the second quarter. Profits in the sector rose at their fastest rate since September 2000, while employment rose for the first time in a year. "This backs up the view that a global economic recovery is under way, but that the pace of growth over the second half of the year remains uncertain," said the CBI's chief economist, Ian McCafferty.

The survey was conducted before last month's accounting scandal at WorldCom, which the CBI said would add to the sector's uncertainty.

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