Factory gate prices fall as wages creep up

Factory gate prices fall as wages creep up

Tumbling oil and scrap metal prices caused the biggest fall in Britain's factory gate prices for more than three years last month, soothing fears that inflationary pressures were building up.

Other data showed, however, that wage rises are creeping up again after several years of stagnation, which may concern the inflation-conscious Bank of England ahead of its meeting to set interest rates, which starts tomorrow.

The Office for National Statistics said output prices at British factories fell 0.4% last month from November, the first fall since May 2003 and the steepest drop since November 2001. It wrongfooted City analysts, who had expected a rise of 0.1%.

The fall left prices 2.9% higher than a year ago, down from 3.5% the month before. Oil prices were down 15% on the month while scrap metal prices were down almost 20% on the month but were still 50% higher than a year earlier, such has been the demand from countries such as China.

Even "core" output prices, which exclude volatile items such as oil and food, dropped 0.3%, the biggest monthly drop since July 1999. That brought the annual rate down to 2.3% from a revised 2.8% in November.

"The Bank of England will be very happy and probably slightly surprised to see core producer price inflation falling back significantly in December," said Howard Archer, economist at Global Insight.

"With input prices falling back substantially during the month amid sharply lower oil prices,.....continued below

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this report will alleviate concerns about the building up of underlying inflationary pressures," he added.

Input prices fell 2.3% on the month, the biggest monthly drop since July 2001. The surge in the pound's value to a 12-year high against the dollar also depressed the prices of imported materials, which fell at their fastest pace since November 1996.

Analysts said the data made it almost certain the Bank of England's monetary policy committee would leave interest rates steady at 4.75% this week. Many now say rates have probably peaked at that level and may well be cut later in the year.

However, a report from the pay specialists Incomes Data Services showed the average pay deal had risen above 3% and was likely to go higher in line with rising headline inflation, currently at 3.4%. IDS said the first pay deals of the new year were firmly in the 3%-4% range, having averaged 3% for most of last year.

"Pay increases in the first quarter of 2005 will be strongly influenced by the higher inflation rate, the strength of the economy and a tight labour market," said the IDS's Alistair Hatchett.

The Bank has frequently expressed surprise that record employment and the lowest unemployment for decades has not pushed wage growth up so will be keeping a close eye on pay settlements in the next few months.

Separately, the latest figures from the Office of the Deputy Prime Minister showed a pick-up in annual house price inflation in November to 13.8% from 12.6% in October.

Economists said the pick-up was due to statistical effects and did not alter the picture of a slowing housing market.

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