'Absolutely horrendous' inflation figures further damp rate cut hopes

'Absolutely horrendous' inflation figures further damp rate cut hopes

The cost of goods leaving Britain's factories is increasing at the fastest rate on record as companies struggle to cope with fuel and raw materials bills up almost 30% on a year ago, the government said today.

Releasing data that further dampened hopes of an early cut in interest rates to revive the flagging economy, the Office for National Statistics said factory gate inflation hit 8.9% - the fastest since comparable records began in 1986.

The ONS said output prices rose by 1.6% in May, with the core rate - excluding food, drink, alcohol and tobacco - up by 1.2% - three times as fast as the City had been predicting.

Although comparisons with previous eras of inflation have been complicated by changes to the way producer prices are calculated, the ONS said industry's energy bills appeared to be rising more rapidly than at any time since the mid 1970s, when the first post-war oil shock sent consumer inflation in Britain to 27%.

The data was "absolutely horrendous" according to Jonathan Loynes of Capital Economics, with all the key numbers far worse than expected. While much of the rise in factory gate inflation is likely to be absorbed in retailers' profit margins, Loynes believes the increases are now so large that "at least some portion of them looks likely to work its way into the high street, even if retail sales slump".

The numbers are, he said, "the clearest signs yet that the inflation problem is starting to spread beyond the.....continued below

Advertisement starts

---

---

Advertisement ends

food and energy sectors".

Howard Archer of Global Insight said the "abysmal" data "further constrains the Bank of England's ability to deliver the interest rate cuts that the economy so badly needs".

He added: "Indeed, it seems ever more likely that the Bank of England will be unwilling to cut interest rates from 5.00% to 4.75% until the fourth quarter of this year, and even a move then is questionable."

Manufacturers have absorbed part of the cost increases in lower profit margins, but have still been forced to raise prices to their customers at a rate not seen since the early 1980s - the time of the second oil shock.

Oil prices rose $11 a barrel on Friday to just under $140 a barrel, amid speculation that the $150 a barrel level would be reached during the summer. UK manufacturers have seen the price of crude increase by 83% over the past 12 months, with the sharp rise this spring pushing up the annual rise in input costs to 27.6%. May alone saw a 3.8% jump in the price of fuel and raw materials.

Producer price inflation is seen by the Bank of England as an early warning sign of rising cost pressures for the economy as a whole and will strengthen the hand of those members of the monetary policy committee nervous about reducing the cost of borrowing. The cost of living as measured by the government's consumer prices index already stands at 3% - a percentage point above its target - and is set to go higher over the coming months as a result of higher energy bills.

Energy bills and falling house prices have pushed consumer confidence to the lowest in five years, with one-in-five people saying they have no spare cash, according to a survey from the British Retail Consortium and Nielsen published today.

guardian.co.uk © Guardian Newspapers Limited 2008