Rate of factory gate price inflation rises

By DIANE COYLE

Economics Correspondent

Prices charged by manufacturers rose 3.8 per cent in the year to March, nearly double their rate of inflation at the trough of the recession. ``Core'' prices, excluding food, drink and tobacco, saw their biggest increase in more than three years.

Many analysts in the City thought the signs that industry was achieving higher price increases pointed to a base rate rise next month, even though the rate of inflation in manufacturers' raw materials costs fell for the second month running. At 11 per cent it was still the third-highest rate for a decade.

More evidence of weak retail sales from the Confederation of British Industry's latest survey of the sector did not derail the bandwagon for a May interest rate rise. The next meeting between the Chancellor and the Governor of the Bank of England takes place the day after the local government elections in England and Wales.

The increase in prices charged at the factory gate, up 0.3 per cent in March after adjusting for seasonal factors, was biggest in sectors that have suffered the highest commodity-related cost increases. These include paper and pulp, chemicals, metals and plastics and rubber.

However, for the first time last month there were significant rises in factory gate prices in other industries. Every sector except transport charged higher output prices.

The pick-up in factory gate inflation is likely to continue.Labour costs per unit of output have begun to edge up, and the pound's fall has increasedthe price of imported components. City economists predict the rate will reach 4.5-5 per cent this year.

High Street gloom means this probably can not be fully passed on. Retail sales weakened for the third successive month in March, the CBI said. Of the retailers surveyed, 39 per cent said sales volumes were lower in March and 28 per cent reported higher sales. The negative balance of -11 was the same as in February.

The gilts market dipped sharply after the publication of yesterday's price figures, with short sterling, the futures market used to bet on interest rate moves showing the strengthening of expectations of a base rate rise.