Pressure on Bank eases as factory price rises slow

 

Pressure eased on the Bank of England yesterday after factory gate prices rose slower than expected, increasing the chances that inflation will fall in the coming months.

Output inflation for manufactured goods slowed to 5.7 per cent last month according to the Office for National Statistics – the lowest annual rate since May and below economists' expectations for a 5.9 per cent increase. The rate had peaked at 6.3 per cent in September.

Factory output prices were unchanged from September while the cost of raw materials used in production fell 0.8 per cent month on month. In the year to October, total input prices rose 14.1 per cent – the lowest annual rate since December 2010.

Manufacturing costs have been driven up by rising prices of oil and other commodities, boosted by unrest in the Middle East and demand for raw materials from China and other emerging markets. Oil prices have dropped by about 15 per cent since the start of May and domestic and imported food price rises have also cooled.

The easing of factory price pressure will be welcome news to the Bank's rate setters. They have kept interest rates at all-time lows and pumped more money into the economy despite consumer price inflation remaining far above the Bank's medium-term target of 2 per cent.

Resisting calls for rate increases to tame rising prices, the Bank's Monetary Policy Committee (MPC) has insisted that inflation is driven by temporary external forces such as energy prices and that an increase in borrowing costs would hit economic growth while doing little to rein in prices.

Howard Archer, the chief UK economist at IHS Global Insight, said: "The benign set of producer price data supports belief that consumer price inflation is headed down sharply over the coming months after likely peaking at 5.2 per cent in September, and that the Bank of England will enact further quantitative easing, most likely early in 2012, to try to boost the struggling economy."

However, the easing of factory prices was not all good news. Though it reflected reduced pressure on margins from commodity prices, the decline, slowing output inflation, was also driven by economic weakness.

Mr Archer said: "The latest survey evidence reinforces the impression that manufacturers' pricing power is weakening markedly as softer demand increases the need to price competitively to try to gain or even retain business."

The Bank held rates at 0.5 per cent on Thursday and kept its target for quantitative easing – or printing money – at £275bn despite inflation surging to 5.2 per cent in September. The Bank has predicted that inflation will fall "sharply" next year as short-term price increases drop out of the figures. It unveils its new growth and inflation forecasts next week.

Construction Contraction

The construction industry contracted less than expected in the third quarter. Output fell 0.2 per cent from a year earlier compared with an earlier official forecast of a 0.6 per cent drop.

The Office for National Statistics said the improved figure would have no material impact on the 0.5 per cent growth in the wider economy for the third quarter.

Construction figures for the previous two quarters were revised upwards. But the industry may face a tougher time as the economy slows and the eurozone crisis shakes confidence.

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