Raw materials cost less but prices surge at factory gate

The price of goods leaving the factory gate surged at the fastest rate for three years last month despite a surprise fall in the cost of raw materials, according to official figures yesterday.

The price of goods leaving the factory gate surged at the fastest rate for three years last month despite a surprise fall in the cost of raw materials, according to official figures yesterday.

Producer prices rose 0.2 per cent in January, taking the annual growth rate to 2.5 per cent, the largest since November 1996. But input prices fell 1.0 per cent between December and January -- the steepest drop for 13 months.

Concern over rising input costs was heightened after the oil price hit $30 yesterday for the first time since the Gulf War. The price of crude oil for delivery next month touched the $30-mark - its highest since January 1991 - in New York trading. The price was driven by a combination of tight Opec supply curbs and increasing demand during the cold weather period.

Professor Tim Congdon, of Lombard Street Research, called the factory-gate hike "disappointing". "The culprit is largely rising oil prices and the effects of the buoyant world economy on other commodity prices," he said.

Continued rate fears knocked about more than 2 per cent off the blue chip FTSE 100 index.

The fall in the cost of inputs took the City by surprise. Analysts had pencilled in a rise of 0.4 per cent and some said the weaker than expected figures were good news for inflation and interest rates. "Certainly we think the Bank of England's Monetary Policy Committee will hold off [raising rates] at least until April," said Rob Hayward, economist at Bank of America.

"Any relief at the weakness of producer prices should be tempered," said Michael Saunders of Salomon Smith Barney. "The drop was almost totally due to the pound's sharp rise last month ... the chances are that input prices will rise again in February." He said output prices - at a two-year high even after stripping out oil and erratics - were a good indicator of inflation in the pipeline.

So far factory price rises have failed to feed through to the high street where core inflation, excluding housing costs, was constant at 2.2 per cent over the last quarter of 1999.

Figures published today are expected to show a drop to 2.1 per cent in January.