Manufacturing output prices suffered their sharpest annual fall last month since records began more than 40 years ago, but economists said the data ought not persuade the Bank of England to make further cuts in interest rates.
Falling demand, weak oil prices and competition from cheap imports conspired to push prices at the factory gate down 0.4 per cent during November, against an expected fall of only 0.2 per cent. The annual rate of decline was 1.0 per cent, the worst figure since records began in 1958.
Most of the fall was attributable to the depressed oil price, which has fallen more than 40 per cent over the past 12 months. Stripping out petrol, food, drink and tobacco, so-called core output prices were unchanged on both last month and last year.
Manufacturers are also benefiting from lower raw material costs. Input prices fell 1.0 per cent during November, making for an annual decline of 11.1 per cent, its fastest downward pace since early 1997.
Economists said the benefit of lower input prices was being offset by continued high wage bills, despite accelerating job losses in the manufacturing industry. "Unit labour costs are currently still around 3.5 per cent higher than they were a year ago," said Simon Rubinsohn, chief economist at Gerrard, the stockbroker. "Both domestic and export margins are continuing to decline. Further layoffs are likely as manufacturers attempt to steady the decline in productivity."
However, John Butler, UK economist at HSBC, said the Bank was not likely to respond by taking rates to less than their present 4.0 per cent. "Inflation will stay low for the next six months, but low inflation doesn't just give free rein when it comes to interest rates. Cutting rates would store up problems with regard to consumer and corporate debt in the future."
The Trades Union Congress repeated its call for lower rates. "These figures make it clear inflation is not a problem. The Bank should be prepared to cut rates again in the new year to give a break to Britain's ailing manufacturing sector," it said.
Economists expect inflation figures out this morning to show the underlying rate, excluding mortgage interest payments, fell to 2.1 per cent against 2.3 per cent in October.
HSBC's Mr Butler said it was only a matter of time before the deflationary pressure in manufacturing was felt in retailing.Reuse content