Fears that rising energy prices could be fuelling inflation were reignited today with official figures showing factory output prices increased for the first time in three months after a sharp jump in raw material costs.
National Statistics reported that manufactures’ input prices surged 1.8 per cent in January, meaning raw material costs are now 15.4 per cent higher than they were a year ago.
But more worryingly for the Bank of England’s rate-setting Monetary Policy Committee – which is charged with maintaining inflation at the government’s 2 per cent target - there was some evidence that manufacturers have started passing on their higher costs to consumers. Prices at the factory gate increased 0.4 per cent in January after three straight months of falls, according to the statistics office.
The MPC has keep borrowing costs on hold at 4.5 per cent since August last year, despite five consecutive quarters of below-trend growth, because of fears that soaring fuel costs might trigger an inflationary spiral with wages and prices both rising.
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Analysts said the figures, which are the first in a week of important economic indicators, add weight to the view that the Bank is unlikely to cut interest rates in the coming months.
“Overall, the producer price data may modestly reinforce the overall leaning within the MPC to remain on the sidelines in the near term at least while it makes sure that underlying inflationary pressures are not building up,” Howard Archer, chief UK economist at Global Insight, said.
Nevertheless, Mr Archer noted that the rise output prices is still relatively subdued compared to the increase in costs.
“Manufacturers are still largely finding it difficult to pass on their higher input costs amid continuing intense competition and relatively muted demand.
“Indeed, the continuing squeeze on margins will maintain pressure on manufactures to further limit employment and investment, with negative repercussions for growth.”
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Most economists believe subdued growth will eventually force the Bank to boost the economy by lowering borrowing costs – most probably in the second quarter of 2006.
Tomorrow the statistics office will release the latest inflation figures and on Wednesday, rate expectations could be reshaped again with the publication of the Bank of England’s latest forecasts in its quarterly Inflation Report.