Fear of stagflation as factory prices rise

Fears of "stagflation" in the manufacturing sector rose yesterday after the CBI said factories had increased their prices as they suffered their first fall in new orders for 15 months.

The country's largest employers' group said domestic prices rose at the fastest rate since July 1995, according to its snapshot survey of more than 700 firms.

Factories' cost bill also hit a nine-year high and manufacturers' worries over raw materials costs were running at their highest level for a quarter of a century.

The figures were published as a member of the Bank of England's interest rate committee, Stephen Nickell, said the era of falling goods prices was over.

Ian McCafferty, the CBI's chief economics adviser, said he would not be surprised if the Bank raised interest rates again in the spring. "Raw material costs are starting to hit home and if costs are being passed on more then there would be implications for headline inflation, and the Bank will be watching that in the months to come," he said.

"I would not be surprised [if they raised rates] but it is very difficult to tell what is going on in the economy at this time of year so the Bank should sit on its hands for some time until the smoke clears."

Mr Nickell, a professor at the London School of Economics and a member of the Bank's Monetary Policy Committee, said goods prices might soon start rising. "It appears that imported goods prices have stopped falling ... and unless there is a further squeeze on margins, it seems likely that goods inflation will move into positive territory."

The Office for National Statistics said this week that manufacturing had contracted for a second successive quarter - the traditional definition of recession.

Mr McCafferty said the CBI's survey pointed to growth of 0.2 per cent in the final quarter of last year, which was a slowdown but "nowhere near" recession.

The CBI's index of order books, derived by subtracting negative from positive responses, fell to minus four from plus four in the previous three months. Its index of export orders fell to minus 8 from zero.

The CBI report and Professor Nickell's comments pushed sterling to a five-week high against the euro.