Inflation fears as factory gate prices rise

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Fears of a longer-lasting spike in inflation were fuelled today after it emerged factory gate prices rose at their fastest pace in 18 months.

As well as the impact of higher oil costs, economists said the 5.7% rise in producer output prices for the year to April suggested firms were taking advantage of a recent recovery in activity to boost profit margins.

The increase, revealed by the Office for National Statistics, was much greater than the 4.6% rise forecast in the City and added to pressure on the Bank of England's monetary policy committee (MPC) at their monthly meeting today.

They are expected to keep rates on hold when the outcome of the two-day gathering is announced on Monday.

Jonathan Loynes, chief economist at Capital Economics, said: "The numbers clearly won't do much to ease the recent concerns amongst one or two MPC members that the current spike in inflation may turn into something longer-lasting."

Inflation hit 3.4% in March, up from 3% in February, although experts expect the rate to fall back sharply later this year and in 2011 as VAT and energy effects fade and the vast amount of slack in the economy kicks in.

If this month's reading of Consumer Price Index inflation remains more than 1% above the Government's 2% target, Bank of England Governor Mervyn King will be forced to write another letter of explanation to the Chancellor.

However, Mr Loynes said interest rates were likely to remain at their record low of 0.5% for some time: "We don't expect the MPC to be spooked into tightening monetary policy when there is already an enormous fiscal squeeze on the way."