UK manufacturers’ costs and their selling prices rose at the fastest rate on record in April, official data showed on Monday, raising doubts over the Bank of England’s scope to cut interest rates next month.

- 13 / 05 / 2008 09:59

UK manufacturers’ costs and their selling prices rose at the fastest rate on record in April, official data showed on Monday, raising doubts over the Bank of England’s scope to cut interest rates next month.

The Office for National Statistics said producers’ output prices rose 1.4 per cent last month, taking annual inflation at the factory gate to 7.5 per cent.

Input prices rose 2.4 per cent between March and April, seasonally adjusted, taking the annual rate of increase to 23.1 per cent.

“Appalling”, “terrible”, and “awful” were among economists’ reactions to the data, demonstrating the pressures that could lead policymakers to tolerate slower growth and delay cutting interest rates to bring consumer price inflation back to target.

Brian Hilliard, economist at Société Générale, said the figures raised “serious doubts about the ability of the Bank of England to cut again in the immediate future,” although markets had priced in a strong possibility of a rate cut in June.

The monetary policy committee would not have seen the data before last week’s decision to leave interest rates unchanged at 5 per cent, but will set out its latest projections for growth and consumer price inflation in this week’s Inflation Report, which is likely to show a strong chance of inflation rising above 3 per cent for several months this summer.

The latest surge in oil prices and a weaker pound raising import prices drove the increase in manufacturers’ costs, while the biggest increases in selling prices were due to soaring energy and food prices and higher duty on alcohol and tobacco.

The ONS said that if the Budget’s increases in duty on alcoholic drinks and tobacco were passed on in full, they would add 0.3 per cent to the output price index in both March and April.

“With oil prices reaching $126 a barrel, commodity prices elevated and the pound weaker, the upward pressure on manufacturers’ costs continues to mount,” said Howard Archer, economist at Global Insight.

Yet even excluding food, petrol and tobacco, ‘core’ output prices rose 1 per cent in April, taking the seasonally adjusted annual increase to 4.5 per cent – worrying, as it may imply demand is not weak enough to stop manufacturers raising their prices.

“As inflation pressure continues to build economic growth must slow further and this casts risks of more subdued 2009 growth than markets are currently anticipating,” said David Page, economist at Investec.

Financial Times