Fresh rise in factory gate prices adds to inflationary pressures

Manufacturers bolstered their profit margins last month by raising prices as the strong pound pushed down the cost of raw materials, official figures showed yesterday.

Manufacturers bolstered their profit margins last month by raising prices as the strong pound pushed down the cost of raw materials, official figures showed yesterday.

The cost of goods leaving the factory gates rose 0.2 per cent between January and February, taking the annual rate of inflation to 1.6 per cent.

The figures, which may presage new inflationary pressures, came as separate figures showed a rise in house prices and continued strong spending on the high street.

Manufacturers have now raised their prices for five months running. Two years ago prices were falling at an annual rate of more than 1 per cent.

"Manufacturers' pricing power continued to improve in February," said Nick Verdi, the UK economist at Barclays Capital. "We expect this trend to continue in the coming months as the manufacturing recovery gathers momentum."

Margins were further boosted by a 0.8 per cent drop in input prices on the month, taking the annual deflation to minus 1.8 per cent, the steepest drop since September 2002.

A breakdown of the figures from the Office for National Statistics showed the largest contribution came from a 1.3 per cent drop in the price of imported equipment.

The ONS said a 0.8 per cent fall in overall import prices was the largest since September 2002, adding that some of that decline was driven by the fall in the dollar. It said some of the impact was offset by a jump in the price of imported chemicals and metals, which could be put down to the China-driven surge in global demand.

Economists said the figures were a "mixed bag" in terms of their implications for the Bank of England's deliberations on interest rates. Interest rate futures rose as dealers bet that falling input costs would give the Bank of England less need to raise interest rates.

"Overall pipeline inflation pressures in the goods sector remain reassuringly benign," Jonathan Loynes at Capital Economics said.

Meanwhile, house price inflation accelerated in January, according to the Office for Deputy Prime Minister.

The index produced by John Prescott's department showed prices rose 0.6 per cent on the month, to take the annual rate to 9.7 per cent from 8.3 per cent and the first rise in four months.

Annual price growth in London, a key indicator of the future direction of the market, rose to 5 per cent from 3.8 per cent in December. The figures confirm the picture from Halifax and Nationwide, two of the UK's largest lenders, that house prices growth is accelerating.

The ODPM's index, which aims to clarify any discrepancies between other data, shows the market is not slowing as the Bank of England has predicted.

Meanwhile the British Retail Consortium said high street spending showed "steady" growth last month but at slower pace than January's punchy rise. Retail sales rose by 5.3 per cent in February, down on January's 6.8 per cent but much higher than the growth seen in the run-up to Christmas.