Factory gate prices give Bank inflation headache

The price of goods leaving the factory gate rose at its fastest rate for three years, official figures revealed yesterday, a day after the Governor of the Bank of England insisted inflation would soon begin to come down.

Producer prices were 6.3 per cent higher in September than in the same month of last year, the Office forNational Statistics said, with the cost of their raw materials rising at anannual rate of 17.5 per cent.

The soaring of input prices was in large part due to a 5 per cent increase in the oil price during September alone and may therefore prove temporary, since the cost of oil has since fallen by 6 per cent.

Nevertheless, factory gate prices tend to take three to six months to feed through to the cost of goods in the shops, prompting warnings that the headline consumer price index measure ofinflation could remain stubbornly high for longer than has been expected.

The Bank of England's Monetary Policy Committee announced on Thursday that it planned to pump £75bn into the economy via its quantitative easing policy, despite fears of the impact on inflation. Sir Mervyn King, the Governor of the Bank, said later that although inflation might rise further in the run-up to Christmas, from the current rate of 4.6 per cent, he expected price rises to fall back towards the MPC's target of 2 per cent early in the new year.

Economists are divided on theoutlook for inflation. Philip Rush, UK economist at Nomura, said companies facing tough pressures on profit margins now had little choice but to pass cost increases on.

"Worryingly for the Bank of England, this greater willingness to raise prices may also be because firmsbelieve that inflation is going to remain higher for longer than the MPCexpects," he said. "Insofar as that is true, inflationary pressures are probably inconsistent with the MPC's decision to launch [a second round of quantitative easing]."

However, Samuel Tombs, UK economist at Capital Economics, said: "We are still confident that the large amount of spare capacity in the economy and current weakness of global demand will help to bring down output priceinflation over the next few months."