Record fall in input costs adds to prospect of interest rate cut

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The Independent Online

Manufacturers enjoyed the biggest recorded monthly drop in the cost of their raw materials in December, thanks to the recent plunge in the oil price, according to official figures published yesterday.

Manufacturers enjoyed the biggest recorded monthly drop in the cost of their raw materials in December, thanks to the recent plunge in the oil price, according to official figures published yesterday.

The unexpected relief from cost pressures in industry raised hopes that figures today for consumer price inflation would show a further decline, with underlying inflation expected to be below its 2.5 per cent target for the 21st month in a row. Tumbling oil prices in November and December saw petrol prices trimmed 1p a litre last month.

Economists firmly believe it is only a matter of time before the Bank of England cuts interest rates, some now pencilling in a quarter percentage point reduction next month. Input prices dived 3.5 per cent in December, according to the Office for National Statistics, taking the year-on-year growth rate to 5.7 per cent from 11.0 per cent in November. Output prices charged by manufacturers also edged lower, falling 0.1 per cent during the month. Their year-on-year rate of increase fell to 2.4 per cent from 2.8 per cent.

Michael Hume, an economist at Lehman Brothers, said: "Firms have started to pass on the effect of lower raw materials costs in their prices." However, they are not passing on the full benefit to customers, in order to start rebuilding profit margins after a vicious squeeze.

'Core' ouput prices excluding energy and food, regarded as the best indicator of future price levels for goods sold on the high street, also fell 0.1 per cent in December and stood just 0.6 per cent higher than a year earlier.

Oil prices have reclaimed some lost ground in the past two weeks, amid fears that Opec will decide to cut production at this week's meeting, starting tomorrow. The benchmark Brent crude price edged up to $26 a barrel yesterday.

The producer price figures helped keep the pound subdued although it has climbed a little from its recent 14-month low against the euro. It was also slightly higher against the dollar yesterday, having strengthened significantly against the US currency in recent weeks.

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