Oil price surge raises material costs

A RECORD surge in the oil price last month sent the cost of raw materials rising at its fastest rate for almost 20 years, adding to concerns over interest rates.

Input prices rose by 3.3 per cent from June - three times the 1.1 per cent expected by the City and the highest rise since January 1980's 4.5 per cent, figures out yesterday show. Annual inflation rose to 2.8 per cent, its highest since January 1996.

The Office for National Statistics said a 22 per cent rise in the cost of oil in one month sent the annual rate spiralling up to almost 70 per cent, the highest rise since records began in 1992. Prices of imported materials rose 2.6 per cent on the month, the steepest since April 1995.

"The three-year-long period of input price deflation came decisively to an end in July," said John O'Sullivan, an economist at Greenwich NatWest. Adam Cole of HSBC said worries about a cost-driven pick-up in inflation were a "further blow to any lingering expectations that rates will fall again in this cycle".

There was relief from figures on factory gate prices showing that industry was finding it hard to pass these costs on to consumers. Output prices rose 0.2 per cent in July to leave annual inflation at 1.1 per cent, in line with City forecasts.

If food, drinks, tobacco and petrol are stripped out, the core figure showed a fall of 0.1 per cent on the month and 0.6 per cent over the year.

"The output side of the figures was much more in line with what the markets expected," said Jeremy Hawkins, economist at Bank of America. "They suggest that, for the time being, there is a lack of inflationary pressure in the economy." The figures had little impact on the pound and stock market, while bonds rose on the muted output data.

Factory inflation is unlikely to feature as a major worry for the Bank of England when it publishes its quarterly inflation report tomorrow. Policymakers are more concerned with the strength of the consumer economy and rising asset prices, especially the housing market.

While inflation at 2.2 per cent is below the Government's 2.5 per cent target, economists will focus on the Bank's two-year forward view. Most forecasters believe interest rates will have to go up towards the end of this year or in early 2000, perhaps by a quarter-point. The markets are pricing in a sharp rise of 2.5 points by the end of 2000.

Growth in high-street sales slowed last month, the British Retail Consortium said. Annual sales rose 3.9 per cent in July compared with 4.5 per cent in June."Customers remain cautious," said the consortium.