The latest evidence of the stagnation in manufacturing came on the eve of publication of the Treasury's summer forecast, which will make it clear that Chancellor Kenneth Clarke's leeway for tax cuts in the next Budget will be tiny. Many City economists believe the Chancellor will exploit the window of opportunity to reduce the cost of borrowing.
"He has the luck of the devil with the figures," said David Hillier, an economist at BZW, predicting a further reduction in base rates when Mr Clarke meets the Governor of the Bank of England at the end of this month.
The 1.3 per cent June drop in the cost of materials was the biggest since September 1993. The year-on-year decline of 4.8 per cent in "core" costs - excluding food, drink, tobacco and petroleum - was the lowest figure since the mid-1980s.
Prices that manufacturers charged at the factory gate fell in June for the second month running, declining 0.2 per cent compared with May. "Core" output price inflation fell to 2 per cent, returning to the mid-1994 trough and the lowest since the 1960s.
"These are some of the lowest rates of producer price inflation in a decade, with no evidence of input price pressures," a Treasury spokesman said.
Yet manufacturing output was flat in May despite price discounting. Although 0.3 per cent higher in the three months to May compared with the previous three, it remained at the same level as a year earlier. Food and drink, textiles and engineering output all advanced during the latest three months.
A surge in energy use due to the cold weather took total industrial output 1.4 per cent higher than a year earlier. Total output has risen 0.5 per cent in the latest three months.
Pessimists think industry will spend the rest of the year clearing the overhang of unsold stocks on the warehouse shelves. "Manufacturing output might well fall for the remainder of this year," said Adam Cole at brokers James Capel.
That bodes well for the outlook for prices. The combination of falling materials costs and weak demand is expected to keep factory gate inflation low.
"This should act as a powerful force to ensure that the Government's inflation target is achieved during the first half of 1997," predicted David Walton at Goldman Sachs.Reuse content