Wholesale prices settle inflation fears

Figures for wholesale prices in June provided further encouraging news on inflation yesterday, writes Diane Coyle.

Manufacturing industry's raw material costs jumped because of soaring commodity prices but charges at the factory gate were flat.

Factory gate prices, an important indicator of inflationary trends, did not move in June. Their year-on-year rate of increase fell from 2.1 per cent in May to 2.0 per cent.

The core rate of increase - excluding food, drink, tobacco and petrol prices - was, at 1.9 per cent, the lowest since November 1967. Gerald Holtham, chief economist at Lehman Brothers, said: 'Inflationary pressures are thoroughly dormant.'

The increase in raw material costs was more disappointing. The 0.8 per cent rise in June was well above market expectations, while May's increase was revised up from 0.9 per cent to 1.5 per cent.

Rising world commodity prices seemed to be behind the surprise surge. The biggest increases were in sectors such as cars and metal- bashing industries which are heavy users of oil and metals.

There was also some evidence of higher paper and pulp prices working through. Prices of materials bought by paper manufacturers have been rising and in June were 1.2 per cent up on a year ago.

With raw materials only accounting for about 5 per cent of manufacturers' costs, economists were not concerned that the unexpectedly high increase would have significant impact on retail prices.

Moderate wage rises are helping to keep factory gate and retail price rises low. A CBI survey showed manufacturing pay awards running at 2.7 per cent in March to May, slightly lower than in the three months to April.

Michael Saunders, an economist at Salomon Brothers, said survey evidence did show a rise in price expectations among purchasing managers, but increases would not be dramatic. 'The recent rise in commodity prices is likely to cause output price inflation to drift up over the autumn and winter,' he said.

Business failures in the second quarter of this year would be 19 per cent lower than the first three months, according to Trade Indemnity, the credit insurance group. It said there would be 835 failures in April-June, down from 1,433 at the same time last year.