Fears of stagflation as input costs rise

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The Independent Online

The spectre of stagflation – stagnant output coupled with rapidly increasing inflation – is returning to haunt the economy for the first time in almost 30 years.

Last month, British business was subjected to the highest annual rise in input costs since 1980. Manufacturers' input prices rose 1.5 per cent in February, which took the rate of cost inflation to 19.3 per cent, the highest since May 1980, according to analysis of the official numbers by Barclays Capital.

Higher energy and food prices were responsible for much of the rise, as was the decline in the value of sterling.

The inflation rate for output prices was 5.7 per cent on the year. This was unchanged from the January rate, but these are the highest readings since July 1991.

Such pressure on "factory gate" prices will be highly worrying for the Chancellor as he puts the final touches to a difficult first Budget and for policymakers at the Bank of England.

Paul Dales, UK economist at Capital Economics commented: "Pipeline price pressures are well above the levels consistent with the 2 per cent inflation target and there is a clear danger that they will eventually find their way on to the high street."

However, despite such inflationary pressures, output and spending remain relatively muted. Official statistics showed that manufacturing production did unexpectedly rise in January for the first time since October, helped by the weaker pound, though overall industrial output fell on the month as utilities production decreased.

Meanwhile, the British Retail Consortium reported consumers tempted out by the January sales stayed away last month as like-for-like sales rose by only 1.5 per cent compared to February last year.

BRC director general Stephen Robertson said: "Belt tightening began in earnest in February when the credit card bills came home to roost."

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