UK economy placed on inflation alert

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The Independent Online

Inflationary pressure is building across the economy according to reports yesterday showing a jump in factory prices and a warning of a likely surge in wage claims.

Inflationary pressure is building across the economy according to reports yesterday showing a jump in factory prices and a warning of a likely surge in wage claims.

The rise in prices of goods leaving the factory gate vaulted to an eight-year high last month as firms managed to pass on some of the impact of soaring oil prices. Meanwhile labour market experts warned a surge in inflation would trigger an upturn in pay deals in the crucial new year bargaining period. In addition retail sales and house price inflation came in stronger than expected.

The pound rose as analysts said the strength of the factory data had put a rise in interest rates next month back on the agenda. Ross Walker, the UK economist at Royal Bank of Scotland, said: "This serves as a reminder that inflationary pressures are not completely dormant."

The Office for National Statistics said output prices rose 0.3 per cent last month, taking the annual rate to 3.1 per cent, its highest since April 1996. The rise was driven by a 10.7 per cent rise in petrol prices, which itself followed a 45 per cent jump in oil prices, the biggest rise since the run-up to the Iraq war. However even stripping out petrol, core factory output inflation rose to an eight-year high of 2.2 per cent.

The ONS said there were rises across all product groups, highlighting an 8.4 per cent monthly jump in the prices of lighting equipment. "It's not just about oil," Mr Walker said.

However, the rises were dwarfed by a 7.3 per cent annual increase in manufacturers' raw materials costs, the largest rise since November 2000.

Industry looks set for further pressure as the figures were taken before the spike in oil prices, which struck fresh highs on both sides of the Atlantic yesterday. Brent broke through $50 a barrel in London while in New York oil prices hit $53.80.

Howard Archer, the UK economist at Global Insight, said: "Inflationary pressure is building and could feed through to consumer prices.The Bank of England will be watching very carefully to see if there are any signs that this is beginning to happen, particularly as oil prices have since risen to new highs."

Incomes Data Services, an independent research body, warns today that companies will face demands for hefty pay rises in the new year. It said headline inflation was forecast to hit a six-year high of 3.6 per cent next month and stay above 3.5 per cent until April next year.

Although this is not the rate the Bank targets when setting interest rates it is still the one preferred by wage bargainers as it includes items such as housing costs and taxes. Alasdair Hatchett, its head of pay services, said: "Higher inflation this autumn will have a strong impact on pay bargaining in January and April, the two key months in the pay calendar. Inflation at 3.5 per cent will provide a higher baseline for next year's pay negotiations. The labour market remains strong and economic growth will underpin upward pressures on pay."

Separate figures showed retail sales posted the fastest growth for three months in September, increasing at an annual rate of 4.6 per cent. The British Retail Consortium said like-for-like sales excluding new stores growth was 1.5 per cent.

The rise was a marked bounceback from August's 3.2 per cent, an eight-month low, and was stronger than the zero like-for-like increase forecast in the City. Helen Dickinson, of the survey sponsors KPMG, said: "The resilience of the UK consumer is quite remarkable."

Elsewhere the Office of the Deputy Prime Minister said the average home price rose 1.1 per cent in August although the annual rate slowed to 13.6 per cent from July's 14.3 per cent.

Britain's trade deficit surged to an all-time quarterly high of £15.2bn as the UK racked up three successive months of £5bn deficits for the first time.