Jump in factory costs puts rate rise back on agenda

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The Independent Online

The pound surged on the money markets yesterday as a sharp rise in manufacturers' raw materials costs put the City on notice for a rise in interest rates.

The pound surged on the money markets yesterday as a sharp rise in manufacturers' raw materials costs put the City on notice for a rise in interest rates.

Official figures showed that factories' input costs last month had risen at their fastest pace for more than four years.

Prices of goods leaving the factory gate fell, meaning manufacturers had absorbed the rise in their profit margins but analysts said they would be forced to pass on the costs eventually.

Yesterday's figures from the Office for National Statistics showed some manufacturers were already responding, with output prices excluding food, drink, tobacco and petroleum rising in January.

The pound rose to $1.8884 from $1.8670 late on Friday. Against the euro, sterling traded at 68.70p, strengthening from Friday's 68.92p.

"Underlying cost pressures continue to rise," John Butler, a UK economist at HSBC, said. "The question over the coming months is whether this causes a squeeze on margins or helps push inflation up."

The ONS said the chief reason for the surge in input prices was a sharp increase in the cost of crude oil. This shot up 14.8 per cent in January, the biggest jump since August, leaving it 40.9 per cent higher on the year.

The ONS publishes overall inflation figures today, while the Bank of England will publish its closely watched quarterly inflation forecasts tomorrow. It is expected to take a more hawkish tone than in November after a stream of strong data, including upbeat house price surveys and robust growth figures.

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