Inflation threatens to force early rates rise

A sudden spike in the cost of goods made by UK manufacturers threatens to send inflation spiralling in the months ahead, economists warned yesterday, just 24 hours after the Bank of England's decision to keep interest rates on hold despite the threat.

The cost of goods at the factory gate was 4.2 per cent higher in December than a year previously, the Office for National Statistics said, up from November's figure of 3.7 per cent.

The acceleration of the pace at which manufacturers are raising their prices reflects even larger increases in the cost of the raw materials they use. Input prices rose at an annual rate of 12.5 per cent in December, up from 9.2 per cent in November, mostly because of much higher fuel costs caused by the rapid increase in the price of oil.

The higher producer prices will not show up in the overall consumer price inflation figures for several months, but could mean the Bank of England is disappointed in its expectation that the pressure will begin to ease as the year goes on. Official figures due to be published on Tuesday are expected to show that inflation hit 3.4 per cent in December, the 11th consecutive month in which price rises have been more than a percentage point above the Bank's 2 per cent target.

In opting to hold interest rates on Thursday, the Monetary Policy Committee took the view that the risk of damaging the recovery with an increase in the cost of borrowing outweighed the danger that inflation would rise further. In part, this reflects the Bank's view that short-term inflationary pressures will ease off in the medium term.