New inflation fears add to Bank's QE quandary

The British dilemma over whether to follow the US in returning to quantitative easing became even more acute yesterday with further evidence of inflationary pressures to come in the months ahead.

Factory gate inflation – the cost of manufacturers' goods – rose 0.6 per cent last month, the Office for National Statistics said, the sharpest increase for six months. The higher inflation reflects a sharp rise in the cost of raw materials, with input prices up 2.1 per cent in October.

The data will fuel concerns that consumer price inflation, which has already been above the target range of the Bank of England's Monetary Policy Committee (MPC) for nine months, will remain stubbornly high for longer than previously thought.

One member of the MPC, Andrew Sentance, has already begun voting for a rise in interest rates at the committee's monthly meetings because he is concerned expectations of higher inflation will become entrenched.

By contrast, Adam Posen, the most dovish MPC member, has been advocating a return to QE, so worried is he about the prospects for the economy. The remaining seven MPC members have so far voted to keep the policy on hold.

Howard Archer, chief UK economist at IHS Global Insight, said the hope was that manufacturers would find it difficult to continue passing on higher input costs and that commodity prices would ease.

"We suspect that going forward, manufacturers will find it increasingly difficult to raise their prices, given likely slower expansion and significant excess capacity," Mr Archer said. "The Bank will certainly be hoping this is the case."

Jonathan Loynes, chief European economist at Capital Economics,described the data as a "mixed bag".

"Both input prices and output prices registered rather bigger increases than we and the consensus forecast had anticipated," he said. "[But] the long lags between PPI and CPI mean that the sharp falls in the former seen last year will continue to feed through into high street goods prices for some time yet."