Record drop in factory prices

A RECORD fall in prices at the factory gate triggered fresh economic gloom yesterday, raising pressure on the Monetary Policy Committee to cut interest rates again next month.

Core output prices for manufactured goods fell by 0.5 per cent in the year to November, the biggest drop since records began in 1958.

Economists said the figures showed there was little inflationary pressure at the start of the chain and underlined the risk of deflation in manufacturing.

"Given the inflation and output data we have seen, I would not be surprised to see at least a 50 basis point cut in January," said James Stewart, economist at Weavering Capital.

Jonathan Loynes, UK economist at HSBC Group, said: "You are seeing deflation working its way along the inflation pipeline. I suspect you will soon see inflation at the retail level falling as well."

Manufacturers paid 8.5 per cent less for raw materials than a year earlier, largely due to the collapse in oil prices. Crude oil, which fell in price by 9 per cent in November, costs 41 per cent less than a year ago.

Some economists said the fall in prices was worrying for manufacturers, who were struggling to stay competitive amid a falling orders. Many are increasingly forced to rely on cheap raw materials to maintain their margins.

The price data brought market jitters, with the FTSE 100 initially falling 74 points. It recovered to close at 5,534.5, down 7.2 points on the day.

Separate figures, however, showed record levels of inward investment. Foreign firms stepped up new direct investment by a record pounds 21.8bn last year, up pounds 6.1bn on 1996 and the biggest rise ever, according to the Office for National Statistics.