Surge in factory gate prices puts pressure on Bank to raise rates

New figures showing that factory gate inflation is continuing to surge are set to prompt further questions for the Bank of England about its strategy of keeping interest rates at a record low.

The Office of National Statistics yesterday revealed that the cost of goods leaving factories rose at an annual rate of 5.7 per cent during June, the highest level for more than two and a half years. Input prices, the cost of raw materials, also continued to rise rapidly, with inflation at an annual rate of 17 per cent.

Higher producer prices do not necessarily feed straight through into consumer inflation, with retailers having to decide how much of the cost increases to pass on, but yesterday's figures do suggest that pressures on the cost of living will continue to rise in the months ahead. Inflation, at 4.5 per cent, is already more than twice the Bank of England's target of 2 per cent.

This week the Bank's Monetary Policy Committee chose to keep the cost of borrowing at just 0.5 per cent for the 28th month, amid fears that while there is little prospect of inflation coming back down towards the target in the next few months, the economic recovery is too fragile to cope with an increase in rates. In fact, in recent months, some members of the MPC have begun to press for a return to quantitative easing, the policy through which the Bank has sought to stimulate the economy in the past.

The sharp increase in the annual rate of factory gate inflation partly reflects the fact that June last year saw pressures ease significantly. On a monthly basis, output prices rose 0.1 per cent – or 0.2 per cent after more volatile elements were stripped out.

Economists welcomed hints that the rate of producer price increases might finally be slowing, but warned there was little room for complacency.

"While the producer price inflation does not make great reading, there are, nevertheless, hints that manufacturers are becoming more circumspect in raising their prices," Howard Archer, the chief economist at IHS Global Insight, said. "This is likely a reflection of manufacturing activity clearly shifting down a gear in recent months. The surge in input prices has also abated recently and eased pressure on manufacturers to hike prices."

George Buckley, of Deutsche Bank, added: "These surveys suggest continued above-average increases in producer prices but some moderation seems likely going forward."

While there remains little sign that consumer price inflation is spiralling out of control, and no evidence that wage settlements have been rising as workers demand compensation for the price increases, there is mounting concern about the effect on household incomes.