Oil price rise puts squeeze on industry

The news on input prices came on a day when oil prices soared towards $64 a barrel to a new record high amid growing fears of militant attacks in Saudi Arabia, the world's biggest oil exporter, and a possible gasoline shortage in the United States. As the US shut its diplomatic missions in Saudi Arabia in response to threats, Britain warned that militants were in the final stages of planning attacks in the Kingdom.

Manufacturers managed to pass on some of the increase in costs to their customers by raising the price of their goods in July for the first time in three months.

The figures took analysts by surprise. They warned that inflationary pressures had not gone away despite the slowdown in the economy, and needed to be watched closely.

The pound rose to a one-month high against the dollar on the news as it fuelled expectations that the Bank of England would not rush into making further interest rate cuts after its quarter-point reduction last week, the first for two years. The pound rose sharply from about $1.7780 to as high as $1.7879, the highest level since 1 July.

Manufacturers' input prices leapt 1.8 per cent in July from the previous month, and surged 13.5 per cent in the year to July, compared with a 12.1 per cent increase in the year to June. It was the largest annual increase since February 1985.

The rise fed through to prices at the factory gate, which also rose sharply - by 0.7 per cent when compared with June, to stand 3 per cent above levels a year earlier.

Howard Archer, of the consultancy Global Insight, said: "With oil prices rising to new nominal highs in August, this evidence of an increase in underlying inflationary pressures will reinforce the belief that the Bank of England is unlikely to cut interest rates again, in the near future at least.

"Meanwhile, the persistent squeeze on manufacturers' margins has worrying implications for investment and employment in the manufacturing sector."

Markets are still unsure whether the Bank will cut the cost of borrowing further this year to shore up sluggish household spending and business investment, or wait until next year.

Daragh Maher, an analyst at Calyon, said: "Anything that signals that the Bank of England may not need to cut again is having a pronounced impact on the market and the producer price index fits into this."

The Market News petrol price index showed yesterday that petrol prices surged by 3.3 per cent in July as the effects of the rise in crude oil prices fed through. That suggests that consumer price inflation, which hit the Bank of England target of 2.0 per cent in June, could have moved above the target in July.

Meanwhile, the housing market continues to cool gradually, with annual house price inflation slowing to 5 per cent in June from 6 per cent the month before, according to figures from the Office of Deputy Prime Minister John Prescott.

Peter Dixon, at Commerzbank, said: "We're pretty near the trough of the downward move in house prices and we should get slightly stronger growth in the second half of the year. The numbers are not going to be fantastic but it's not all doom and gloom."

A survey from the British Retail Consortium yesterday showed a 1.9 per cent fall in retail sales on a like-for-like basis compared with a year ago.