Five-month high for factory prices stokes inflation worries

Factory price inflation reached a five-month high yesterday, adding to the Bank of England's worries about rising inflationary pressures and dampening expectations of an interest rate cut next month. However, separate reports found that retail sales remain weak while house price inflation eased to a nine-year low.

Government figures showed factory gate prices rose 0.7 per cent in September, pushing the annual rate to 3.3 per cent, as manufacturers sought to pass on higher energy costs to their customers. The core measure of producer prices, which excludes petroleum, rose unexpectedly to an annual rate of 2.1 per cent. Some City analysts said the figures could persuade the Bank to sit on its hands next month rather than react to mounting evidence of slowing economic growth by cutting rates. Simon Rubinsohn, chief economist at Gerrard, said: "Our best guess is that the authorities might wait a little longer and want more evidence that the spike in inflation is temporary."

Consumer price inflation, the Bank's targeted measure, is already running well above the 2 per cent target and it is set to rise further in coming months on the back of high energy costs. The Bank's decision to cut rates in August was opposed by several committee members - including the Governor Mervyn King - who were mindful of rising inflationary pressures. Other members - Stephen Nickell, David Walton and Richard Lambert - have recently acknowledged that the Bank's forecast for economic growth could be undershot, mainly because consumer spending remains weak.

The Bank may take heart from the news that raw materials costs were down unexpectedly by 0.3 per cent last month as oil prices came off their record highs. Prices were still up 10.3 per cent from a year ago, as the cost of crude oil soared by more than 40 per cent over the past year.

Meanwhile, retailers continue to struggle, with their sales down for the sixth month running in September, according to the British Retail Consortium. It reports today that retail sales dropped by 0.8 per cent from a year ago on a like-for-like basis, taking the three-month rate down to a fall of 1.4 per cent. Retailers sold fewer clothes and shoes than in July and August despite a late boost from the autumn/winter ranges when the weather cooled. Total sales, including new stores, rose 3.1 per cent last month.

House price inflation dipped to an annual rate of 2.8 per cent in August, according to figures from the Office for the Deputy Prime Minister.