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UK factory prices rise at fastest rate in a year

January 08, 2010 | "Times Online"

It is said to be unlikely that manufacturers will be able to significantly lift their prices over the coming months

British factory gate inflation rose by more than expected in December and at its fastest rate in nearly a year, official figures showed today.

The price of goods leaving factories rose by 3.5 per cent on last year, according to the Office for National Statistics (ONS), beating forecasts of a 3.1 per cent increase.

Output prices rose by 0.5 per cent on a monthly basis, reflecting increases in other manufactured products, transport equipment, food and electrical products.

Input price inflation, which reflects the cost of raw materials and overheads, also picked up more than expected, by 6.9 per cent, its fastest annual rate since November 2008. This follows a two-thirds rise in crude oil prices over the year.

Meanwhile, core producer prices rose by 0.7 per cent month-on-month in December suggesting that manufacturers may be trying to take advantage of marginal improvements in activity to push through price increases.

The Bank of England has warned that consumer price inflation, which is currently at 1.9 per cent, could exceed 3 per cent early this year because of the rise in VAT and the end of favourable base effects from the sharp drop in oil prices at the end of 2008.

However, the Bank, which left base rates unchanged at 0.5 per cent yesterday, believes that inflation will fall back later this year.

Howard Archer, chief UK and European economist of IHS Global Insight, said it was unlikely that manufacturers would be able to lift their prices significantly over the coming months, given substantial excess capacity and elevated competition amid continued challenging conditions.

However, he added that the sharper-than-expected rises in producer prices raised concern that consumer price inflation could climb higher than the Bank of England expected.

“Consequently, the data reinforces our belief that the Bank of England is unlikely to further extend its quantitative easing programme… or raise interest rates before late 2010.”

By Francesca Steele

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