Rise in producer prices fuels fears of persistent inflation

Higher wheat prices were blamed for an unexpectedly sharp increase in producer inflation last month as the Office for National Statistics (ONS) revealed that the costs of raw materials were up by more than twice City expectations.

The ONS said yesterday that producers' input prices – the cost of raw materials – increased by 0.7 per cent in September, and by 9.5 per cent on an annual rate – an increase on the 8.7 per cent on the annual rate reported in August. An increase in wheat prices – caused largely by a widespread drought in Russia – was identified as one of the major reasons for the rise.

The figures will fuel the debate between members of the Bank of England's Monetary Policy Committee (MPC) about a change on interest-rate policy. Rates were this week maintained at a record low 0.5 per cent for a 20th consecutive month. But there are opposing voices on the issue within the MPC: Andrew Sentance has been calling for a rate rise since June, but Adam Posen has argued for an increase in the Government's £200bn quantitative easing programme to help to boost economic activity.

"The September producer data are disappointingly high, with both output and input prices rising more than expected," said Howard Archer, the chief economist at IHS Global. "The data are likely to reinforce concern that consumer-price inflation will remain sticky and significantly above target over the coming months.

"Even so, the Bank of England still seems highly unlikely to raise interest rates any time soon, given slowing growth and the serious headwinds facing the recovery," he added.

Output prices – the cost of finished products leaving factories – were also up by a stronger-than-estimated 0.3 per cent last month. Year on year, output prices were 4.4 per cent higher last month than in September 2009.

Despite yesterday's higher-than-expected figures, Mr Archer argued that manufacturers would find it increasingly difficult to pass on higher input prices to consumers in the future.

"We suspect that going forward, manufacturers will find it harder to raise their prices, given significant excess capacity and likely slower expansion," he said. "The Bank of England will certainly be hoping that this is the case."