Commodity prices fuel inflation spike

Surprise figures for March show pressures in pipeline

Economics Editor,Sean O'Grady
Saturday 10 April 2010 00:00
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Strong inflationary pressures are set to feed through to shop prices over the next few months, according to the latest data on "factory gate" inflation.

Wholesale price inflation jumped to a surprisingly high annual rate of 5 per cent in March, up from 4.2 per cent in the year to February. City observers described the news as "unappetising" and "concerning". Some, if not all, of that rise will feed through to the shops over the next year, though how far retail prices rise will be affected by how much of the increase is absorbed by the supermarkets.

The reasons for the increase in factory gate prices is not difficult to see: the rapid rise in commodity prices since last autumn, as a pick-up in global growth, especially from emerging economies such as India and China, has pushed up input prices for British manufacturers and suppliers. The weak pound has also lifted the price of imported materials.

The Office for National Statistics said that the input price index for materials and fuels purchased by the manufacturing industry rose 10.1 per cent in the year to March and rose 3.6 per cent between February and March alone. The ONS added that prices of imported materials as a whole, including imported crude oil, rose 4.4 per cent between February and March.

The input price index for manufacturers, excluding the food, beverages, tobacco and petroleum industries, rose 4.0 per cent in the year. Recent data from the labour market suggest that wage pressures may be building, though marginally, after a long period of restraint and freezes in the private sector.

Overall, the mix of recent data indicates a tightening of profit margins, especially among manufacturers trying to absorb rising costs when demand remains weak, at home and abroad.

Although British retail inflation is low by historical standards, at 3 per cent on the CPI measure and 3.7 per cent on the RPI measure, it is high by international standards – it is 0.9 per cent in the eurozone, 2.1 per cent in the US, and 1.1 per cent in Japan.

It suggests that price pressures and inflation may be "stickier" in the UK than elsewhere, though the radical depreciation in sterling since the beginning of 2007 of around 25 per cent is part of the reason for that, and it ought to protect British exporters from any immediate adverse effects.

Longer term, the UK's relatively poor inflation performance may suggest underlying competitive weakness and will push the Bank of England towards raising rates or reversing quantitative easing sooner than it might wish – though few expect that to happen before the autumn.

Howard Archer, the senior economist at Global Insight, said: "The producer price data make pretty unappetising reading and will be the cause of some concern within the Bank of England's Monetary Policy Committee."

Jonathan Loynes, the chief European economist at Capital Economics, added: "March's surprisingly strong rise in UK producer prices will prompt some concern that pipeline inflation pressures are building."

However, Mr Archer and Mr Loynes stressed that the deflationary pressures in the economy should prevent the rise in inflation being too strong, and predict that inflation will fall back again and that the Bank will keep rates at or close to the current record low of 0.5 per cent until next year.

Mr Loynes said: "Although output price inflation has reached 5 per cent, that is still only half the level reached back in 2008. With unit wage cost growth in the manufacturing sector having recently slowed sharply, we suspect that it is unlikely to rise much further. And even if it does, we think that retailers will struggle to pass the cost increases on in the high street anyway.

"Overall, we do not expect this to prevent consumer price inflation from dropping back later this year and in 2011."

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