Factory gate prices increase by 4 per cent: Interest rate reductions in France and Portugal put pressure on the Bundesbank and boost UK share prices

PRICES at the factory gate rose by 4 per cent in the year to May, the highest rate of inflation for manufacturing prices since March 1992.

The monthly rise of 0.2 per cent was the lowest since last December but was accompanied by an unexpected 0.2 per cent increase in manufacturing industry's raw material prices.

However, excluding volatile prices for food, drink and tobacco, which provides a rough guide to future movements in underlying retail price inflation, factory gate prices rose by just 2.6 per cent in the year to May.

The figures left financial markets divided on the prospects for lower base rates, with some analysts arguing that the news had, in effect, ended hopes for another cut in rates. Kenneth Clarke, the Chancellor, is expected to sidestep the question in his keynote speech to the City today.

On the Continent, cuts in leading French and Portuguese interest rates raised the prospect of even lower rates in Europe, and renewed pressure on the Bundesbank to reduce its own key rates.

These latest signs that some European countries may be decoupling their interest rate policy from the Bundesbank placed Helmut Schlesinger, the German central bank president, on the defensive yesterday. 'That does not mean the (ERM) anchor role of the mark is endangered,' he said.

Ignoring the producer price figures, London shares rallied on the continental rate cuts and there was speculation in the equity market that further European cuts would enhance the prospects for lower British rates. The FT-SE 100 index climbed by 23.7 points to close at 2,885.5.

The increase in underlying factory gate prices came after a 0.1 per cent rise during the month and was slightly below the 2.7 per cent recorded in the 12 months to April.

In the three months to May, this measure of factory gate prices rose by 2.8 per cent over the previous three months, slightly below the rate recorded earlier this year but well above the 1.8 per cent trough reached in December 1992.

But sterling's depreciation since last September has helped to push up food prices sharply. Factory gate prices for food manufacturing rose by 6.2 per cent in the year to May, far outstripping the 4 per cent rise for all manufacturing industry. Prices for raw materials purchased by the food, drink and tobacco industries were up by 9.4 per cent in the year to May, the highest rate since Black Wednesday.

Despite sterling's recent stability and weak commodity prices, upward pressures on overall raw material prices pushed up the monthly index after adjustment for seasonal influences and left prices 7.3 per cent higher in the year to May. This was slightly above the previous month but well below the recent peak of 8.4 per cent reached in March, which reflected the impact of the pound's sharp depreciation last September. Before seasonal adjustment, prices fell by 0.3 per cent during the month.

There was little reaction in financial markets, where attention was focused on a quarter-point cut to 7.25 per cent in key French rates, which brought them to parity with the German discount rate.

Yesterday's French and Portuguese rate reductions leaves all eyes on the Bundesbank, which holds its regular council meeting on Thursday.

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