Manufacturers see input prices drop

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The prices paid by UK manufacturers posted the biggest drop in more than two years in August, official figures revealed today, as a period of high inflation for the sector appeared to pass its peak.

Producer input prices fell 1.9% last month, compared to a 0.5% increase in July, while prices charged by manufacturers to their customers slowed, increasing 0.1%, compared to a 0.3% boost the previous month.

The reduction in input prices was driven by a 5.9% dive in crude oil costs, fuelled by fears the global economy is heading back into recession, while weak demand squeezed manufacturers' pricing power.

The slowdown will ease pressure on the Bank of England to curb the high rate of consumer prices index (CPI) inflation, weakening the chance of an interest rate hike and increasing the likelihood of a further cash injection into the Bank's quantitative easing programme.

The softer figures, released by the Office for National Statistics, will be welcome relief to cash-strapped consumers who will hope to see the falling manufacturing costs passed on amid the biggest squeeze on household spending since the 1920s.

CPI inflation hit 4.4% in July, well above the Bank's 2% target, marching ahead of average wage growth and effectively corroding away consumers' disposable incomes.

The impact of the spending downturn is being felt throughout the economy, most obviously in the retail sector, where major high street names are experiencing plunging trade.

Samuel Tombs, UK economist at Capital Economics, said: "August's producer prices figures provide the strongest indication yet that cost pressures in the industrial sector have peaked."

He added: "Barring a renewed surge in oil prices, input price inflation should fall rapidly over the coming months and be back down to single-digits by the end of the year."

The slight rise in output prices was driven by a boost to the price of chemical and pharmaceutical products, the ONS said, while lower petroleum product prices offset a greater overall increase.

The improved outlook for price inflation will be a welcome relief for the Bank's Monetary Policy Committee which is hoping the cost of living will start falling throughout next year and in to 2013.

The monetary policy debate has shifted focus away from interest rates and back to QE - also known as money printing - as the need for emergency support to jump-start the recovery becomes more apparent.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The data do not fundamentally change the view that any interest rate hike is off the agenda for the Bank of England for a considerable time to come given the current softness of the economy and weakened growth prospects.

"It is clear that if the central bank does act anytime soon, it will be to try to stimulate economic activity through more quantitative easing."