Let-up in factory gate prices offers glimmer of hope on inflation

Some respite in the seemingly relentless inflationary pressures facing the economy was promised yesterday with the publication of the latest figures on "factory gate prices", the producer price index.

Helped by a sharp fall in the price of oil and other commodities over the month, British industry reported that input costs actually fell in July, by 0.6 per cent.

Such an easing in cost pressures will eventually feed through to lower prices in the shops, and will be especially welcome to policymakers at the Bank of England as they try to grapple with the dilemma of simultaneously avoiding recession and inflation.

Even so, the annual figure for cost inflation only fell to 30.1 per cent from 30.8 per cent last month. A separate survey by the CBI out today also shows a record number of small and medium-sized businesses are still suffering rising costs, with a balance of 62 per cent noting increases over the past three months. Nearly a third of firms surveyed also expect to increase their prices in the current quarter, while a balance of 20 per cent have already passed on some costs in price rises between April and July.

The figure for annual consumer price inflation today is widely expected to exceed 4 per cent, against the official target rate of 2 per cent. Most observers see inflation peaking at 5 per cent or more by September. The Bank of England's own Inflation Report, giving its definitive view on the economy, is out tomorrow.

However, despite the hopeful signs for the future, factory gate inflation is still running at record levels. Output prices rose by 0.4 per cent last month, to push the annual rate of inflation up to 10.2 per cent, the highest since this series began in 1986.

"Core" producer price inflation, excluding volatile food and energy items, rose by 0.3 per cent, lower than expected. Food prices jumped by almost 12 per cent on the year, while petrol was up by 35 per cent, these two items comprising half of the total increase in costs, reflecting the boom in commodity prices. Crude oil has risen in price by 80 per cent in a year.

The weak pound – which has depreciated in value by 12 per cent since last summer – is adding to the inflationary difficulties, whilst not yet yielding much positive impact in the trade figures.

Import price inflation rose from 14.5 per cent to a record high of 15.6 per cent. Higher inflation in economies from China to the EU is also contributing to this pressure. However, official data also showed that the trade deficit widened from £7.4bn in May to £7.7bn in June. In the year to June, export volumes rose by only 1.9 per cent, compared to a 1.6 per cent rise in import volumes.

Paul Dales, UK economist at Capital Economics, said: "Rather than using the lower pound to boost their competitiveness, exporters are still using it as an opportunity to raise their selling prices and boost their profits."