Interest Rates: Factory price rises more than expected

THE increase in prices charged at the factory gate in August was the biggest for four months, writes Diane Coyle.

Figures published yesterday showing higher-than-expected prices in manufacturing industry took economists by surprise, and increased support for the view that the base rate rise was necessary to nip inflation in the bud.

The Treasury said output price inflation remained low by historical standards. Even so, the unexpected 0.3 per cent increase last month took the year-on-year rate of increase in prices charged by manufacturers to 2.3 per cent from 2.0 per cent in July. Excluding the prices of food, beverages, tobacco and petroleum - all fairly volatile - the output price index climbed 0.4 per cent in its biggest monthly increase since September last year.

The prices paid by manufacturers for materials and fuels purchased continued on their upward path. Before adjustment for seasonal effects, they fell 0.6 per cent during the month, thanks to a fall in crude oil prices and a decline in prices of UK-produced inputs for food manufacturing. After adjustment, however, they rose 0.5 per cent. Input prices rose 3.4 per cent in the year to August, and 6.1 per cent between January and August.

The acceleration in input prices has been caused by faster commodity price inflation and higher import costs. The Central Statistical Office said yesterday that over the past year there have been rises in the prices of most categories of imported goods.

So far, manufacturers have not been able to pass on the increases in input prices to the prices they charge at the factory gate. Last week brought some indications that higher inflation is beginning to work its way along the chain, with a few companies - notably paper manufacturers such as Bowater and Arjo Wiggins Appleton - announcing that they have persuaded customers to accept price increases.