Factories squeezed as input prices hit 20-year high

Pressure on manufacturers' profit margins intensified last month, according to figures released yesterday that showed a surge in the cost of raw materials to a 20-year high but a fall in the prices of goods leaving the factory gate.

Pressure on manufacturers' profit margins intensified last month, according to figures released yesterday that showed a surge in the cost of raw materials to a 20-year high but a fall in the prices of goods leaving the factory gate.

The costs of raw materials ordered by factories rose 2.5 per cent in February, pushing the annual rate of inflation to 14.5 per, ahead of January's 10.4 per cent and City forecasts of a 12.0 per cent rise. The main culprit was oil, which is now 172 per cent up on a year ago - its highest since the oil crisis of 1974.

But firms were unable to pass on the bulk of the increase to their customers. Output prices rose 0.1 per cent on the month, leaving the annual rate at 2.3 per cent, lower than both January's 2.4 per cent and forecasts of 2.5 per cent. Despite soaring input costs, it is the first fall in output price inflation since November 1998

Economists said the data were good news for the outlook for inflation and for interest rates but questioned how long industry could contain the price pressure by cutting profit margins. The detailed figures from the Office for National Statistics showed the 14.5 per cent annual rise in materials and fuel used by factories was the highest since February 1980.

Although oil was the main driving force, there were also signs of other pressures. The cost of palladium and rhodium, non-ferrous metals used in the production of catalytic converters for cars, rose 4.2 per cent in February alone or 21.5 per cent on the year.

The rise in commodity prices pushed annual inflation in total imported materials up to 12.9 per cent, the steepest since September 1995. The lack of inflation at the factory gate was shown by figures for core output prices for goods - excluding food, drink, tobacco and oil - that were unchanged for the third month in a row. Measured on the same basis, input costs rose 1.9 per cent, the highest since December 1995.

Economists said the data supported those on the Monetary Policy Committee who wanted rates to stay on hold. James Carrick, of ABN Amro said: "There is little need for interest rates to rise any further." Jonathan Loynes, of HSBC, said the good news for inflation was offset by bad tidings for industry. "With recent surveys hinting at a softening in demand for manufacturers' goods, this is another cloud over the outlook for industry," he said.

Others said that price inflation may start to fall if the price of crude oil continues to come off its highs. Brent crude broke through the $30 a barrel mark last week for the first time since the Gulf War but has dropped back since.