Jump in factory gate prices suggests industry passing on costs

Signs that manufacturers are starting to pass on rises in raw material costs emerged yesterday from figures showing that prices of goods leaving the factory gate rose at their fastest rate for almost a year.

Signs that manufacturers are starting to pass on rises in raw material costs emerged yesterday from figures showing that prices of goods leaving the factory gate rose at their fastest rate for almost a year.

The cost of finished goods jumped by 0.5 per cent between February and March - the fastest since April 1999 - partly due the measures in theBudget. This left an annual rate of 2.3 per cent, which was below February's 2.5 per cent but ahead of forecasts of a more modest 2.0 per cent.

The Office for National Statistics said Budget hikes in duty on petrol, cigarettes and alcohol would have added 0.2 per cent to the index if they were all passed on.

David Coleman, chief economist at CIBC World Markets, said: "The gain in output prices is a little high for comfort, even if Budget excise measures were passed on in full. This still leaves 0.3 per cent due to other influences, which may include pressure from the dramatic rise in input costs."

Excluding categories affected by measures in the Budget, prices rose by 0.6 per cent in March, up from 0.4 per cent previously and the largest monthly increase for more than three years.

Manufacturers' margins have been squeezed over the past year as fierce competition has forced them to absorb sharp rises in raw materials, led by a near tripling of the oil price. This has contributed to record low inflation and any change would worry the Bank of England's interest-rate committee.

There was mixed news on growth in input prices - raw materials and energy costs - which fell back sharply to 0.8 per cent from February's 2.8 per cent. On an annual basis, it rose by 13.8 per cent compared with 14.2 previously.

Crude oil rose by 136 per cent in the year to March, down from 172.3 per cent previously, reflecting the fall in the price ahead of Opec's sanctioning an increase in production.

Analysts said, however, that despite the rises in factory gate prices, policy makers at the Bank of England would hold off from interest-rate rises for some time to come.

Neil Parker of Royal Bank of Scotland said: "We do not think these data threaten further interest-rate rises." Brendan Baker of Lombard Street Research said: "Higher output price inflation is likely at some stage, but the current environment makes a significant increase unlikely in 2000."

Further evidence of high-street competition came from the British Retail Consortium, which said that shop sales grew at their slowest rate for almost a year last month.

The value of total retail sales rose by 1.8 per cent, compared with 5.9 per cent in February; this was the smallest rise since April last year. The BRC said the figure was distorted by the early timing of the Easter holiday last year, which contributed to a strong month in March.

Competition between retailers has forced businesses to increase its sales volumes to maintain profits as they cut costs to remain competitive, a separate survey out yesterday shows.

Profitability of UK businesses over the first three months of the year fell for the fifth successive quarter, the Euler Trade Indemnity survey said. At the same time total business activity rose to its highest level in five years.

William Simpson, chief economist at the credit insurance company, said business was struggling to cope with the strong pound and four recent hikes in interest rates. "Many companies have borrowings and, as profit margins get pressured, so their activity has to be boosted," he said.

Although there is little sign of inflation in manufacturing, which has seen an fall in activity for three months in a row, the consumer economy is growing strongly. Unemployment is at a 20-year low and earnings are rising well above the level the Bank thinks consistent with its inflation target.