Soaring factory gate prices add to inflation woe

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The Independent Online

New data revealing soaring inflation in Britain's manufacturing sector piled the pressure on the Bank of England yesterday, just 24 hours after its Monetary Policy Committee opted to hold interest rates despite rising prices.

Output prices – the cost of goods leaving the factory gate – rose by a full percentage point in January, figures from the Office of National Statistics revealed, taking the annual rate of this type of inflation to 4.8 per cent.

Manufacturers are being forced to pass on rapid increases in the cost of raw materials and fuels, with input prices up by 1.7 per cent in January alone. That took the annual input price inflation rate to 13.4 per cent.

The pressures faced by the sector largely reflect soaring commodity prices. The oil price, in particular, continues to move upwards, with the cost of a barrel of oil rising above $102 yesterday amid concern about the political turmoil in the Middle East. While Opec, the producers' cartel, now seems to be ready to raise production quotas to ease the pressure, there has been little sign of any slowdown, with oil prices rising by 5 per cent last month.

Metals prices, too, continue to rise, adding to the cost of manufacturers' raw materials.

Producer price inflation will not show up in the official consumer price inflation figures for some months yet – and may not, in any case, be fully passed on to consumers. However, the data suggests there is little prospect of relief in the months ahead, with consumer price inflation, currently at 3.7 per cent, unlikely to fall to within the 1-3 per cent target range during the first half of 2011.

Official CPI data for January will be unveiled on Tuesday, with Mervyn King, the Governor, due to present the Bank of England's quarterly inflation report on Wednesday. Mr King will face scrutiny on whether the Bank is losing its credibility as an institution capable of delivering price stability. However, City economists warned there was little the MPC could do to bear down on inflationary pressures caused by external factors such as the commodity price surge – or the January increase in VAT.

"These figures were higher than expected and they support our expectation that annual consumer price inflation is likely to increase towards 4.5 per cent over the next few months," said David Kern, chief economist at the British Chambers of Commerce. "This will create an uncomfortable background for the MPC and will lead to more demands for early increases in rates, but there is nothing the MPC can do in the short-term to prevent a temporary increase in inflation."

Though it is split, the majority judgement on the MPC so far has been that inflationary pressures are set to ease in the medium term and that raising rates prematurely would jeopardise the country's faltering economic recovery.

New figures published yesterday revealing that the construction sector contracted by 2.5 per cent during the final three months of last year – too large a dip to be fully explained by the cold snap in December – underlined the fragility of the economy.

However, Alan Clarke, UK economist at BNP Paribas, warned: "We are getting to the point where the Bank will struggle to get away with labelling these higher upstream profits as one-offs." Samuel Tombs, UK economist at Capital Economics, added: "The risk of a near-term hike in interest rates remains very much alive."