Higher rate fears as cost of raw materials jumps

A jump in the cost of raw materials last month due to higher oil prices left the financial markets on edge about the risk of another increase in interest rates. Although underlying inflation at the factory gate remained at its lowest for 29 years, yesterday's figures were not quite as favourable as expected.

Inflation figures due on Thursday are expected to show that the target measure climbed above 3 per cent last month, pushed higher by petrol prices. By last night's close the financial markets were betting that base rates will be a full percentage point higher at 7 per cent by June.

The latest survey of the high street by the British Retail Consortium, published this morning, will provide some reassurance about inflation prospects. It shows that retail sales growth picked up in October, but the BRC said it did not add up to a runaway boom.

Andrew Higginson, chairman of the economic affairs committee, said: "Whilst retailers are encouraged by this good performance, there is no sign of the 1980s-style boom that some commentators are talking up."

The prices manufacturers paid for raw materials and fuel rose by 0.5 per cent in October. It took the year-on-year rate of decline up to minus 2 per cent. The increase during the month was entirely due to rising crude oil prices, which were 45 per cent higher than a year earlier.

This also helped take prices charged at the factory gate up by 0.2 per cent during the month, although there were smaller increases in the prices of tobacco, textiles, chemicals, and a range of machinery and equipment. The annual rate of output price inflation edged up to 2.3 per cent.

Even so, "core" producer output prices, excluding food, drink, tobacco and energy, rose by only 0.9 per cent in the 12 months to October, matching the previous month's low.

The fact that the oil price was mainly to blame for last month's increases reassured some analysts. "Inflationary pressures are otherwise very weak," said Simon Briscoe at Nikko Europe.

Others were more concerned. "The producer price figures are still incredibly good but they are not going to get any better," said Robert Barrie at BZW.

The BRC's survey, published in advance of official figures, showed that retail sales grew 5.9 per cent in value in the year to October. This was higher than September's 5.2 per cent but a shade under the August-October average of 6 per cent.

The report said there had been an encouraging start to Christmas trading. Sales growth remained strong in areas related to the housing market, especially furniture and carpets where gains were described as "excellent". Sales of personal computers were also stellar.

Separate figures on the number of insolvencies from accountancy firm Deloitte & Touche showed that this year looks likely to see the lowest number of appointments to receiverships and administration orders since 1989.

The total in the 10 months to October was 1,387, compared with 2,013 in all of 1995, and 1,507 in 1989.