May 14, 2007 / 9:18 AM / 13 years ago

Pressure eases at start of inflation pipeline

LONDON (Reuters) - Manufacturers’ raw material costs rose less than expected in April while factory gate inflation eased after a strong pick-up in March, official data showed on Monday.

A worker assembles a car at a BMW plant in Mahendra March 29, 2007. Manufacturers' raw material costs rose less than expected in April while factory gate inflation eased after a strong pick-up in March, official data showed on Monday. REUTERS/Babu

The figures suggested price pressure at the start of the inflation pipeline may not be building as fast as the Bank of England feared, encouraging investors to scale back bets on higher interest rates.

“The producer price data for April are relatively reassuring for the Bank of England and marginally dilute pressure for another hike in interest rates,” said Howard Archer, chief economist at Global Insight.

The central bank raised rates last week to a six-year high of 5.5 percent in a bid to dampen inflationary pressure. Many in the market still expect another rise to 5.75 percent in the coming months.

Bank policymakers have been particularly concerned by signs that firms have become more confident about raising prices.

On this score, Monday’s figures provided reassurance. Input prices rose 0.7 percent in April against forecasts for a 1.0 percent rise while core output prices gained just 0.1 percent, well below the 0.3 percent forecast.

Consumer price figures for April are due on Tuesday and most analysts are forecasting inflation will have eased as a result of lower household bills.

Alan Clarke, an economist at BNP Paribas, said the slowdown in producer price inflation boded well for Tuesday’s consumer price inflation release but he warned the central bank was not out of the woods yet.

“The breakdown of the output producer price index suggests there is still plenty of upstream price pressures from the likes of food, tobacco and alcohol in the coming months,”

Non-seasonally-adjusted output price inflation eased to 2.5 percent in April compared with a year ago, down from a seven-month high of 2.7 percent in March.

The fall was mainly due to weaker transport costs and more muted rises in some raw materials costs than in the previous month.

The Office for National Statistics said that tax increases on tobacco and alcohol announced in the Budget in March would have added 0.15 percent to the overall output price index if passed on in full.

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