Inflation fears quelled by factory gate data

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The Independent Online

Fears of a longer-lasting spike in inflation eased today after it emerged that growth in factory gate prices slowed by more than expected last month.

Output prices rose 4.7% in the year to August, compared with 5% in July and the lowest level posted by the Office for National Statistics since February.

The decline will be welcomed at the Bank of England where policymakers have seen consumer prices inflation remain above their 2% medium-term target.

The cost of materials and fuels purchased by the manufacturing industry also fell in August, with the annual increase of 8.1% down from 10.8% in July after a fall of 0.5% between the two months. This defied City expectations for a rise of 0.2% and mainly reflected a fall in the price of crude oil.

Jonathan Loynes, chief European economist at Capital Economics, said today's figures offered further tentative evidence that cost pressures at the start of the inflation pipeline were beginning to ease.

He noted today's rates were still high and that there were long lags between changes in producer prices and movements on the high street.

Mr Loynes added: "The fact that pipeline cost pressures now seem to be easing somewhat should provide the Bank with further reassurance that inflation will be back below its target at its two to three-year policy horizon."

Today's release also highlighted the near-term threat from stronger food prices.

Economists at Barclays Capital said home-produced food prices rose by 1.4% month-on-month in August, largely due to a 19.5% rise in the price of wheat following fires in Russia.

The annual rate of food input price inflation rose to 8.4% in August, the highest since October 2008, they added.

Barclays expects the impact of rising food prices to be shown in inflation figures for August, due to be published by the ONS on Tuesday.

"Evidence of stronger food prices has led us to raise our forecasts for inflation, and is the main reason we expect the headline rate of CPI to rise to 3.2% in next week's release, from 3.1% in July," analysts at Barclays added.