Falling oil price pushes factory gate inflation to near 15-year low

Last month brought the biggest drop for nearly 15 years in the prices manufacturers charge for goods at the factory gate, thanks mainly to declining oil prices.

Last month brought the biggest drop for nearly 15 years in the prices manufacturers charge for goods at the factory gate, thanks mainly to declining oil prices.

Even excluding the oil effect, however, the annual increase in output prices remained modest, suggesting the outlook for inflation is extremely favourable. Economists expect official figures for consumer prices, due today, to show headline and target inflation edging lower last month, while tomorrow brings the latest quarterly Inflation Report from the Bank of England.

The weakness of prices in manufacturing last month was seen as fully vindicating last week's reduction in interest rates to 5.75 per cent.

Manufacturing output prices fell 0.4 per cent in January, according to yesterday's figures, the biggest monthly decline since May 1986. Excluding the volatile petroleum and food, drink and tobacco components, there was a monthly increase of 0.6 per cent, but the year-on-year rise in "core" prices was also just 0.6 per cent. The prices paid for inputs of raw materials rose 0.5 per cent in January, taking the year-on-year increase up slightly to 6.3 per cent.

The figures painted an unexpectedly benign picture of inflationary pressures in industry. "We were expecting manufacturers to use the opportunity of lower input costs to restore profit margins," said Michael Hume, UK economist at Lehman Brothers. He said the fact they had not done so suggested competitive pressures remained intense. Jonathan Loynes, chief UK economist at Capital Economics, said recent CBI surveys had indicated manufacturers expected to push price increases through. "But we have our doubts about whether this can be sustained in a weakening demand environment," he said.

Ross Walker, an economist at Royal Bank of Scotland went further: "The combination of rising input costs and falling output prices will squeeze margins further," he predicted.

The price paid for oil in industry fell 2.8 per cent last month, but other costs such as imports of paper and textiles increased. "Core" input prices, excluding oil and food, rose 0.7 per cent in January, the biggest increase (adjusting for seasonal fluctuations) since last July.

The International Energy Agency yesterday predicted slower world economic growth, on top of a mild winter, would trim oil consumption, and it cut its forecast for demand in 2001 by 140,000 barrels a day to 1.5 million barrels. The oil price has climbed from its recent lows but the impact in the UK has been limited because of the strength of the pound against the dollar.

Central bank governors meeting in Hong Kong yesterday, said the world economy would pick up in the second half of this year. Andrew Crockett, general manager of the Bank for International Settlements, said that interest rate cuts would help restore growth.