February 1, 2018 / 5:17 PM / 2 years ago

Inflation warning lurks in latest UK factory PMI

LONDON (Reuters) - British inflation might linger at high levels for longer than many economists expect, based on the details of a survey watched closely by Bank of England officials who are preparing their next quarterly outlook.

A woman walks past closed retail units in Manchester, northern England December 7, 2011. REUTERS/Danish Siddiqui

The latest IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) showed factories raised selling prices last month at the fastest pace since April 2017, despite a slowdown in growth across the sector.

The price hikes were particularly acute across manufacturers of consumer goods.

This could be cause for unease among BoE officials, since the PMI’s gauge of selling prices for consumer goods factories is a reliable guide to official data on consumer goods prices.

Goods account for more than half the weighting of the Office for National Statistics’ consumer price index.

Inflation jumped in Britain after the decision by voters in June 2016 to leave the European Union which hammered the value of the pound and pushed up the cost of imports.

In the euro zone, inflation was just 1.4 percent in December, less than half Britain’s 3.0 percent.

Overall, the PMI chimed with a Confederation of British Industry report last week that showed overall factory selling price expectations hit their highest level since 1984.

The BoE and most economists polled by Reuters reckon consumer price inflation peaked in November last year when it hit 3.1 percent, with the recent appreciation of sterling - mostly against the U.S. dollar - helping to limit inflation pressure over the couple of years.

On the other hand, oil prices hit a more than three-year high last month, and the chart below suggests the expected decline in British inflation through 2018 may be painfully slow.

That may be food for thought for BoE Governor Mark Carney, who on Tuesday said the central bank’s focus was increasingly on returning inflation to the BoE’s 2 percent target.

Carney is due to present the BoE’s new economic outlook and interest rate decision next Thursday.

GRAPHIC - UK inflation set to linger for longer? reut.rs/2ExPxWA

Reporting by Andy Bruce; Editing by Hugh Lawson

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