Gains in factory gate prices increase pressure for rate rise

The price of goods made in Britain rose at the fastest rate for 19 months in June, according to official figures that will ring alarm bells at the Bank of England.

Manufacturers raised their prices by 0.1 per cent last month, the sixth rise this year, taking the annual rate of inflation at the factory gate to 3.3 per cent.

This figure has not been higher since November 2004 and will add to fears within the Bank of a rise in inflationary pressure that would justify a rise in interest rates, analysts said.

The rise in prices came despite a fall in factories' raw materials costs, indicating that manufacturers now feel confident they can rebuild their profit margins.

Stripping out energy costs, which have dominated industry for some months, the annual rate of "core" output inflation rose to a 19-month high of 2.9 per cent.

Howard Archer, the chief UK economist at Global Insight, said: "The output inflation data will not please the Bank of England. The fact they have risen by 0.3 to 0.4 per cent for the past four months indicates manufacturers in some sectors have taken advantage of firmer demand."

Recent surveys have pointed to a marked increase in orders, particularly to meet a surge in demand from the eurozone economies.

Some analysts said that the Bank would take some relief from the fact that manufacturers were still unable to pass on the entire impact of raw materials costs, where inflation is still in double digits.

James Knightley, at ING Financial Markets, said: "Given that competitive pressures are strong, we doubt that higher input costs will be passed on to the consumer in a significant fashion.

"Nonetheless, the Bank remains concerned about inflation in an environment of stronger growth. As a result, we still see the risk of the Bank raising rates in November."

Last week the Bank left rates unchanged at 4.5 per cent for the 11th successive month. While policymakers appear in no hurry to move borrowing costs yet, many economists expect a rise in the months ahead.

The figures from the Office of National Statistics showed scrap metal was one of the biggest drivers of factory gate prices in June because of burgeoning demand from countries such as Turkey and China.

The ONS said recovered secondary raw materials prices rose by 56.8 per cent on the year - the fastest rate since comparable records began in 1991.