Jump in factory gate prices gives warning

Higher duties on tobacco and petrol announced in the Budget at the end of November led to a big increase in prices charged by manufacturers last month. Yet prices at the factory gate also rose after excluding the Budget effects, warning of higher retail price inflation in the pipeline.

In a speech yesterday evening, Eddie George, Governor of the Bank of England, reminded his audience that the first rise in base rates in September was a response to "clear direct evidence of price pressures". He warned against exaggerating the weakness of consumer spending.

Factory gate prices jumped 0.7 per cent in December, taking them to a level 2.6 per cent higher than a year earlier."Core" prices, excluding food, drink and tobacco, rose 0.3 per cent after adjustment for seasonal fluctuations.

It was their biggest increase in a year, with their year-on-year rate of growth climbing to 2.8 per cent.

More ominously, the trend in core output prices - measured by most economists as the rise in the latest three months over the previous three months - reached an annual rate of 4.5 per cent. This was the highest trend rate since April 1991.

The biggest increase came in basic metals, with prices up 8.2 per cent in the 12 months to December. Prices charged for chemicals rose 4.6 per cent in the year, and for rubber and plastics 4.2 per cent.

These industries suffered the biggest increases in prices paid for inputs of materials and fuels.

Metal producers faced input prices 20.9 per cent up on the year, while chemicals inputs increased 11.6 per cent in price. Overall, input prices rose 8.3 per cent last year, and 0.4 per cent last month.

Kevin Darlington, UK economist at Hoare Govett, said: ``There is further evidence in the figures of the capacity pressures developing within manufacturing.''

The reason increases in input and factory gate prices had not yet fed through to retail prices was competition in retailing, he said.

Most City economists think the competitive squeeze on retailers' profits margins is near its limit, in which case higher prices charged by manufacturers could start to be passed on to consumers.

Even so, most thought yesterday's figures were not alarming enough to require an early rise in interest rates.

Michael Saunders, at Salomon Brothers, said: "Early March looks a likely time for the next rate move."

The next meeting between the Chancellor of the Exchequer and the Governor of the Bank of England takes place on 2 February. Retail prices for December will be published tomorrow.

Hamish McRae, page 28