Surprise fall in factory prices puts pressure on Bank

Inflation may fall below 2 per cent target

The Bank of England is coming under pressure to increase its emergency quantitative easing programme – popularly referred to as printing money – following a surprisingly sharp drop in factory gate prices.

Government figures showed prices at the factory gate fell by 1.2 per cent in the year to June – four times as much as the 0.3 per cent fall in May and well ahead of the expected 0.8 per cent. Prices have not fallen this quickly since the end of 2001. Manufacturers have been given more leeway to cut costs thanks to the cost of raw materials declining at the fastest pace in 12 years.

There was an 11 per cent drop in the year to June compared with 8.5 per cent in the year to May, although rising oil prices may bring this trend to an end. The figures are seen as an illustration of the pressure manufacturers face.

The Bank caught the City by surprise on Thursday when it held off committing itself to spending the final £25bn of £150bn allocated by the Treasury for "quantitative easing" in March, intended to stimulate the economy.

Economists said yesterday's figures made the announcement of a new quantitative easing programme in August likely. They said the fall could lead to the consumer prices index measure of inflation falling beneath the 2 per cent target for the first time in nearly two years.

Philip Shaw, chief economist for Investec, said: "A fall was always on the cards given this time last year food and energy costs were rising steeply. What surprised us was the month-on-month movement. If you exclude food and energy that was 0.8 per cent."

Mr Shaw said the figures suggested that the inflationary impact of the fall in sterling earlier this year appeared to have eased. He said he expected the Bank to restart "quantitative easing" next month. "Markets have anticipated what the Bank did on Thursday as the possibility of an end to quantitative easing. We think it is more likely that we will see a future increase."

Howard Archer, chief UK economist at IHS Global Insight, said: "Producer output prices were far weaker than expected in June, indicating that manufacturers remain under intense pressure to price competitively. Substantially increased spare capacity and still difficult conditions are maintaining pressure on firms to price competitively to gain business."