Record product inflation dents rate cut hopes

By Matt Falloon and David Clarke

LONDON (Reuters) - Manufacturers raised their prices at the sharpest rate in at least 22 years in April and their costs climbed at a record pace, data showed on Monday, denting the chances of an interest rate cut next month.

Sterling rose and interest rate futures dived as the stronger-than-expected figures encouraged investors to bet that rates may not fall as much as expected this year. The data even cast doubt on what had been a sure-fire bet that the Bank of England would cut rates at its June meeting.

"The chances of a respite on the rate front next month just got further away," said Geoffrey Dicks, an economist at RBS.

Signs that manufacturers are passing on the soaring costs of their raw materials to customers will add to Prime Minister Gordon Brown's problems, as public confidence in his leadership wanes, the economy slows and living costs rise.

The Office for National Statistics said output prices rose an unadjusted 1.4 percent on the month in April, taking the annual rate up to 7.5 percent. Both rates were the highest since the official series began in 1986.

Input prices rose an adjusted 2.4 percent on the month, taking the annual rate up to 23.1 percent -- also the highest since records began -- driven by soaring fuel and food costs.

"The rise in input prices is gathering pace as the weak pound compounds already high global inflation," Dicks said. "That is the bad news. The awful news is that higher costs are increasingly finding their way through to the factory gate."

Core output prices, which strip out food, drink, tobacco and fuel, rose an adjusted 4.5 percent on the year in April.