Slower inflation clears way for MPC to boost economy

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Factory gate inflation fell to a six-month low in August, official data revealed yesterday, providing further ammunition to campaigners who want the Bank of England's Monetary Policy Committee to embark on a new round of quantitative easing to stimulate the UK's faltering economy.

The price of goods coming off the production line rose 4.7 per cent year-on-year in August, down from 5 per cent in July and the lowest price increase since February. Input price inflation – the cost of materials and energy – remains higher, at 8.1 per cent, but was also down sharply compared with July, when it was 10.8 per cent.

However, while the general trend for producer prices now seems to be downwards, the headline figures mask some significant underlying variations. A sizeable fall in the cost of oil last month was enough to counter the effects of sharp rises in food prices, prompted by a spike in the cost of commodities such as wheat and barley.

Moreover, the figures remain high by the standards of recent years. With producer prices typically taking a year to 18 months to feed through into the prices paid by consumers, the data suggests further upwards pressure on consumer price inflation, which the Bank of England has been struggling to control for some time. CPI is currently running at 3.1 per cent, well above the Bank's 2 per cent target.

Still, economists said the producer prices data, which was better than had been widely expected, would give the MPC a little more breathing space. The committee has in recent months struggled with a dilemma, pondering whether further quantitative easing might be necessary in the face of the slowing recovery, while also worrying that high inflation might instead justify tightening of monetary policy rather than loosening.

"The fact the producer price inflation appears now to have peaked and is likely to fall again over the coming months should help to ensure that CPI will be back at, or below, its 2 per cent target at the MPC's two- to three-year policy horizon," said Jonathan Loynes, chief European economist at Capital Economics.

"[That] should help to ensure inflation worries do not prevent the MPC from embarking on another bout of quantitative easing should the economy require further policy support."