Slowdown in factory gate inflation

Evidence that price rises at the factory gate are slowing brought the best news on inflation for more than a year yesterday.

The annual rate of increase in prices charged by manufacturers fell last month for the first time since July 1994. The rise in the cost of fuel and raw materials bought by manufacturers dropped to its lowest rate since last November, and earlier increases were revised down. The Treasury called the figures encouraging; they were better than City economists had been expecting. Michael Saunders of investment bank Salomon Brothers said: ''Another of the conditions for lower base rates has fallen into place.''

Yesterday's statistics made it clear that the bulge in material and fuel costs has passed its peak. In the 12 months to August input prices rose 8.9 per cent, down from 9.6 per cent in July and a peak of 12.1 per cent in January. In the latest three months they rose at an annual rate of only 5.1 per cent.

The decline was exaggerated by a recent dip in oil and energy costs, but prices of materials such as chemicals, metals and pulp and paper, which soared earlier this year, also edged lower. Prices for June and July were revised down.

Prices charged by manufacturers rose by 4.4 per cent in the 12 months to August, and by a lower-than-expected 0.2 per cent in the month. Factory gate inflation was slower across the board - with the exception of pulp and paper prices, which recorded another hefty rise of 0.8 per cent in the month.

The ''core'' rate of output price inflation, excluding food and fuels, remained at 5 per cent last month. Analysts are optimistic that the rate will fall during the next few months, although their degree of optimism varies.

James Barty, UK economist at Deutsche Morgan Grenfell, said: ''The underlying rate has probably now peaked.'' But Adam Cole at James Capel said: ''This is more of a plateau than a peak. Unit labour costs are rising.''

Changes in inflation at the factory gate feed through to retail prices with a delay of about six months. Most City economists expect figures for retail price inflation last month, out on Thursday, to show another increase. The RPI excluding mortgages rose 2.8 per cent in the year to July, above the Government 2.5 per cent target.