Factory gate prices rise but inflation peak in sight

Prices at the factory gate are rising at their fastest rate for almost three years, official data revealedyesterday, adding to fears that the headline rate of inflation is likely to climb further during the second half of 2011.

The Office for National Statistics said producer price inflation hit 5.9 per cent in July, up from 5.7 per cent a month previously. The latest rise was caused by another increase in the cost of raw materials and commodities, with input price inflation rising from 16.8 per cent to 18.5 per cent last month.

The Bank of England is due to publish its quarterly Inflation Report next week and is expected to caution again that consumer priceinflation, currently more than twice its target, at 5 per cent, has further to rise.

That is likely to prompt some criticism of the Bank's Monetary Policy Committee's refusal to raiseinterest rates in order to counterinflation. Instead, the MPC has taken the view that inflation is likely to peak in the second half of the year – and that a rate rise would damage the economic recovery.

Economists said there was some support for that thesis in yesterday's figures because the rise in inflation between June and July was the slowest for several months. That suggests the MPC may be right to predict a peak in price rises.

Howard Archer, chief UK economist at IHS Global Insight, said: "While the producer price inflation figures do not make great reading, it is notable that the monthly increases in output prices are markedly less than during the early months of this year and the latter months of 2010 and it does appear overall that manufacturers are becoming more circumspect in raising their prices."