Price figures send out mixed signals

PAUL WALLACE

Economics Editor

Core factory gate inflation rose to a four-year high of 4.5 per cent in May, but the annual rate of increase in input prices paid by manufacturers fell back considerably to 10 per cent.

The rise in output prices showed the extent of the battle being waged over inflation.

The Chancellor of the Exchequer, Kenneth Clarke, is expected to re-state his inflation targets at a speech at Mansion House tomorrow. The latest price figures give him mixed messages.

The increase in the core output price index, which excludes food, drink, tobacco and petroleum products, attested to the continuing build-up of inflationary pressures in the pipeline. For the moment, however, these are not being passed through to retail prices thanks to consumer resistance on the high street.

Revisions to the figures for March and April showed that the monthly rate of increase was 0.4 per cent rather than the 0.3 per cent previously calculated. This fell back to 0.3 per cent in May. However, the three- month on three-month rate of core output price inflation was just over 5 per cent, indicating that factory gate prices are likely to rise even faster in the months ahead.

The strongest inflationary pressures remained in basic goods, which have been hit by the rising cost of raw materials. Rubber and plastics rose at 9 per cent, chemicals at 8 per cent and paper at 7 per cent.

Input prices, on the other hand, showed further signs of levelling off. The annual rate of inflation in materials and fuel purchased by manufacturing industry fell back sharply from 11.5 per cent in April to 10.0 per cent in May.

Although this was affected by a particularly large increase in input prices a year ago dropping out of the comparison, the monthly rate of increase also slackened considerably, from 0.8 to 0.2 per cent. Given sterling's continuing weakness, this indicated the return of some stability to commodity prices.

The three-month annualised rate of input price inflation was 7 per cent. This indicates that the annual rate should continue to fall back.

Reaction to the figures was mixed in the City. Adam Cole, economist at James Capel, said that "with capacity utilisation in manufacturing historically high, factory gate inflation will accelerate further over the coming months". However, Geoffrey Dicks of NatWest Markets, placing more emphasis on the easing of cost pressures and the reluctance of consumers to pay over the odds, said: "We are at or close to the peak in the output price cycle."