No relief for inflation as factory gate prices continue to climb

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The Independent Online

A sustained fall in commodity costs cannot come quickly enough for British manufacturers – and the UK's inflation data – with new figures yesterday revealing that prices at the factory gate are continuing to surge.

The cost of goods produced by manufacturers rose at an annual rate of 5.3 per cent in April, official data showed. While this was slightly lower than March's figure of 5.5 per cent, stripping out the effect of a smaller rise in duties last month compared to April 2010, inflation was still at 5.5 per cent.

Moreover, input price inflation, measuring the rise in the cost of manufacturers' raw materials, hit a new high last month, the Office of National Statistics said. Input prices rose by 17.6 per cent over the year to the end of April, compared to 14.8 per cent in March.

That increase was primarily caused by another jump in the oil price, which was up by 7 per cent during April alone, but other commodities have continued to rise in price quickly too. The data, which contradicts other recent surveys suggesting the worse of the price increases in the sector may be beginning to ease, will feed through into the consumer price index measure ofinflation over the months ahead, as manufacturers pass on their costs.

"Companies are under major pressure from sharply rising input costs to defend their margins by raising their output prices, and recent extended,decent manufacturing activity has given companies greater scope to push through price hikes," said Howard Archer, chief UK economist at IHS Global Insight. "The producer price data are worse than expected across the board and will not be well received by the Bank of England."

The Bank's Monetary Policy Committee this week rejected calls for an interest rate rise to counter inflation, which is currently running at 4 per cent, twice the target rate, so any further pricing pressure is likely to prompt criticism of its strategy.

However, business groups haverepeatedly warned that the economic recovery is not yet sufficientlyentrenched for a rise in the cost of borrowing to be sensible.

With the spike in inflation mainly caused by higher commodity prices, there is also doubt about whether a rate rise would in any case bring inflation lower. While Thursday's correction on global commodity markets was not repeated yesterday, economists said that a period of retrenchment was the best hope of seeing the inflation rate begin to slow.

"If sustained, [these commodity price falls] should feed through to lower consumer price inflation in the coming months," said Chris Williamson, an economist at Markit.

"Annual input price inflation could fall into negative territory early next year if these falls are sustained," said Samuel Tombs, an economist at Capital Economics. "[And while] producers are still having some success in passing on the rise in their costs, core output price inflation remained relatively restrained," he added.