Higher gas prices put squeeze on profitability

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The Independent Online

A record surge in wholesale gas prices in November piled on the misery for manufacturers by triggering the fastest rise in input prices for four months, according to official figures that stoked inflationary concerns.

Fears of an abnormally cold British winter triggered a 44.9 per cent jump in wholesale gas prices on the previous month. Tough competition and subdued domestic demand forced factory owners to absorb the surprise 12.5 per cent annual rise in input prices, putting their profit margins under further pressure.

John Butler, the UK economist at HSBC, said: "UK manufacturers are being squeezed through a combination of weak output and a narrowing in their price-cost mark-up. That softness in demand is one strong reason why the hike in the cost of raw materials is not translating into higher retail price inflation."

The Office for National Statistics said output prices fell 0.2 per cent on the month in November reflecting a weakening of petrol prices during the month. This trimmed annual factory gate inflation to its weakest in more than a year and a half at 2.3 per cent. Excluding petrol, food, drink and tobacco, core output prices dipped to a 27-month low at 1.2 per cent.

Worries about higher energy costs, however, weighed on manufacturers who painted a bleak picture of the coming months in a separate survey by the Confederation of British Industry. More manufacturers expect output to fall than rise over the next three months, the employers' organisation said. Weak export orders compounded the issues facing the sector.

Howard Archer, the UK economist at Global Insight, said: "Manufacturers are still finding it difficult to pass on their higher input costs amid continuing intense competition and relatively soft domestic demand."

The Bank of England is watching for signs that the rise in oil prices, which have pushed headline inflation beyond target, are feeding through to other areas of the economy.

Daragh Maher, the market strategist at Calyon, said: "The fact that these higher costs are not making their way further along the production chain will provide the Bank with some comfort. The problem is that not all on the MPC [Monetary Policy Committee] will be convinced that this state of affairs can continue."

The CBI survey showed that price expectations climbed to an eight-month high, suggesting manufacturers remain optimistic they can pass on some of the rise in gas prices. British gas prices were among the lowest in Europe over the past decade but they have risen sharply this year as the UK became a net importer because of falling output from its North Sea fields.

Separately, the Office of the Deputy Prime Minister dampened hopes that the housing market had turned the corner with a report that showed house prices fell 0.3 per cent in October. This trimmed annual house price inflation growth to 2.2 per cent, a nine-year low.

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