UK factory gate inflation hits 29-month high

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The price of manufactured goods shot up at their fastest rate for two-and-a-half years last month, spiking 5.4 per cent higher than in March 2010.

So-called "factory gate" inflation rose sharply in response to spiralling raw materials costs, particularly oil, the Office of National Statistics (ONS) said.

As if on cue, oil jumped to $125 per barrel for the first time since August 2008 in afternoon trading in London, buoyed by continuing concerns over the political situation in the Middle East. Gold also soared yesterday, hitting an all-time record of $1,469 an ounce, although prices dropped slightly later on, and silver reached a 31-year high of more than $40 an ounce.

Rising prices for manufactured goods are bad news for an economy already facing falling consumer confidence in the face of tax rises and government spending cuts.

Behind the increases in prices for manufactured products – which rose by an unexpectedly high 0.9 per cent from February to March – is the rocketing cost of raw materials, according to the ONS. Input price annual inflation was running at 14.6 per cent in March, a 3.7 per cent month-on-month increase.

The grim statistics will add weight to calls for the Bank of England to raise interest rates. At a meeting earlier this week the Bank's Monetary Policy Committee agreed to hold rates at their current all-time low of 0.5 per cent. But signs of manufacturers passing on rising commodities costs will increase the likelihood of a rate rise in May, Howard Archer, the chief economist at IHS Global Insight, said.

"The producer price data are simply nasty and worse than expected, which will do little for the Bank of England's peace of mind," Mr Archer said. "Much will clearly depend on how well the economy appears to be performing and how it is standing up to the major fiscal tightening that kicked in in early April."

With commodity prices likely to remain high and even rise further, the pressure on manufacturers' margins is unlikely to ease in the short term. Chris Williamson, the chief economist at Markit, described yesterday's ONS data as "more awful news for UK manufacturing", pointing to industrial output statistics published earlier this week that showed manufacturing growth flattened out in February.

"Worse may be yet to come, as oil prices have since hit a record high in sterling terms and supply chain disruptions from the Japanese earthquake could also drive up prices for certain highly sought-after components," Mr Williamson said yesterday.

"The manufacturing sector is clearly in dire straits and if production fails to pick up, the sector will need to start reducing headcounts again to cut wage costs and protect margins, which are being squeezed by these raw material price hikes," he said.

There were also gloomy figures from the construction sector yesterday. Although output rose by 8.6 per cent in February compared with January, the less volatile three-month rolling growth rate showed the volume of output down by 18.3 per cent over the period from December to Feburary, according to the lastest ONS report. New work fell by 19 per cent and repair and maintenance fell by 16.8 per cent.

The biggest fall was in private housing work, down by 23.3 per cent, the ONS said. Private commercial new work fell by 21.3 per cent and private housing repair and maintenance dropped by 20.4 per cent.