Sharp rises in raw material costs stoke inflationary fears as factory orders fall

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The Independent Online

The cost of raw materials for industry surged to record levels across the Western world last month, driven by the oil price surge, according to surveys yesterday. The reports will add to fears of rising inflation and interest rates in the UK, Europe and United States.

The cost of raw materials for industry surged to record levels across the Western world last month, driven by the oil price surge, according to surveys yesterday. The reports will add to fears of rising inflation and interest rates in the UK, Europe and United States.

In Britain, prices paid for raw materials and labour rose at the sharpest rate for almost five years, despite only a modest rise in the sector's rate of expansion.

The manufacturing economy recorded further expansion in March but at a slower pace than in the second half of last year, said the Chartered Institute of Purchasing and Supply (Cips).

The sector has now grown for 11 months in a row, thanks to further rises in both output and new orders. But the build-up has put pressure on factories, with raw materials costs rising and delivery times lengthening.

The prices index rose at its highest level since August 1995 with almost a quarter of the 620 firms saying prices were higher than the previous month. Firms blamed shortages of commodities for an increase in the length of time taken to deliver finished products.

"These shortages in supply, combined with strong global demand and high oil prices, outweighed the deflationary effect of the strong pound to lead once more to sharply rising prices," Cips said.

The volume of new orders grew more slowly than the previous month, with firms blaming the strong pound for making UK goods less competitive abroad.

Analysts said the survey contained nothing new to influence the Bank of England's decision on rates on Thursday. David Hillier, UK economist at Barclays Capital, said the Bank would have to raise rates despite the poor manufacturing background: "This data suggest this month is probably the least painful time to do it." But Stewart Roberston, of Lombard Street Research, said sterling should prevent a hike.

Prices paid by US factories in March rose at their steepest rate for five years, according to the National Association of Purchasing Management. Overall, industrial activity grew for the 14th straight month. Larry Rice, at Josephthal Lyon & Ross, said: "Prices are going up. It just confirms we are going to get an increase in interest rates next month. The real question is whether it's a quarter or a half a point."

In Europe, the manufacturing sector expanded at its fastest rate since the survey began three years ago, while orders book grew strongly indicating further expansion ahead.

But prices were also a worry in the eurozone, with the cost of raw materials rising to a record high last month. While the oil price was a key factor, the weak euro also pushed up prices.

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