Soaring factory costs fuel talk of rate cut

Factories cut the prices they charge their customers last month despite a record surge in raw materials costs, putting their profit margins under pressure and clearing the way for a cut in interest rates next month.

Official figures published yesterday showed that manufacturers' input costs rose at the fastest pace in June for almost two decades.

Jonathan Loynes, the chief UK economist at Capital Economics, said: "This is good news for high-street inflation, but not for profits.Producers are having to absorb the bulk of the ongoing rise in costs rather than passing it along the supply chain."

The Office for National Statistics said producer input prices rose 2.1 per cent last month compared with City forecasts of a 1.9 per cent rise. That took the annual rate of input price inflation to 12.1 per cent - the fastest rate since March 1985. The chief reason for the rise was a 13.1 per cent jump in the cost of crude oil, which has been trading at about $60 a barrel. This was 51.3 per cent higher than a year earlier, the fastest rise since October 2004.

The prices of goods leaving the factory gate fell 0.2 per cent in June, taking the annual rate to 2.3 per cent from 2.5 per cent in May - the weakest rate since September last year.

The figures echoed the results of the surveys of industry by the CBI and the Chartered Institute of Purchasing and Supply that pointed to further price cuts by firms.

Howard Archer, a UK economist at Global Insight, said: "The data should not stand in the way of an interest rate cut in August."

Meanwhile house-price inflation fell to its lowest rate in almost four years in May, government data showed. The annual rate slowed to 6.0 in May from April's 6.9 per cent.

The fall was even more noticeable in London where the average property price fell to 1.6 per cent in May from 2.7 per cent in April.

However prices in the UK rose between April and May although the figures are not seasonally adjusted, and analysts said prices usually rose in May.

Separate data showed that the UK's trade gap with the rest of the world narrowed to £4.96bn in May from £5.13bn in April. Imports, which are an indicator of consumer demand, fell in May.