April 13, 2012 / 1:14 PM / 6 years ago

UK factory price hikes, weak construction test BoE

LONDON (Reuters) - British factory gate prices rose more than expected in March, while a feeble rebound in construction in February kept the threat of recession alive, highlighting the Bank of England’s dilemma over whether to spur the fragile economy any further.

Consumer price inflation data next Tuesday and BoE April policy meeting minutes a day later will give more clues about the chances of the bank extending its asset purchase programme when the current round, pumping 50 billion pounds ($80 billion) into the economy, ends in May.

The central bank has forecast that inflation will fall below its 2 percent target this year, although oil price spikes have already raised questions marks over that prediction.

Data from the Office for National Statistics on Friday showed producer output price inflation eased to 3.6 percent in March, the lowest annual rate since January 2010. That was down from the 4.1 percent recorded in February but still above the 3.4 percent economists had forecast.

“Sticky inflation would maintain the squeeze on consumers’ purchasing power and make it harder for the Bank of England to do more quantitative easing should the economy struggle to return to sustainable growth,” said Howard Archer, chief UK and European economist at IHS Global Insight.

The statistics office said input prices were 5.8 percent higher on the year, which was the lowest annual rate since November 2009 but still well above economists’ forecast of 4.6 percent.

Economists now expect that consumer price inflation actually ticked up in March to 3.5 percent from 3.4 percent, a Reuters poll showed on Friday.

Such a reading would heighten unease among policymakers such as chief economist Spencer Dale or external member Martin Weale, who have voiced concerns about inflation and indicated their reluctance to sanction another round of monetary stimulus.

Paul Fisher - one of the most dovish policymakers - defended the central bank’s past decisions to pump a total of 325 billion pounds of quantitative easing in an interview with website MSN.

Factors such as oil prices and an increase in value added tax would have pushed prices up even without the stimulus but the economy would have been worse off, Fisher said.

“Activity would have been lower, unemployment would have been higher and we would got locked into almost certain deflation and depression,” he said.


Separate figures showed on Friday that the construction sector is likely to act as a drag on first quarter growth, despite a 6.1 percent rise in output in February following a 12.9 percent drop in January.

While the un-adjusted data had to be taken with a pinch of salt, they seemed to indicate another quarterly drop in construction and possibly overall economic output in the first quarter, Barclays Capital analysts said in a note.

Britain’s economy contracted in the last quarter of 2011 and official GDP figures due on April 25 will show whether it has fallen back into a recession during the first quarter.

Upbeat business surveys have been offset by the weak construction numbers and a surprise slump in manufacturing.

But further quantitative easing would be difficult if inflation proves sticky. Consumer price inflation stood at 3.4 percent in February, well down from its 5.2 percent peak last September but still far above the BoE’s 2 percent target.

The central bank and the government are hoping that a fall in inflation will encourage consumers, who have been squeezed by weak wage growth, rising household bills and government cuts.

Despite those pressures, Britain’s biggest department store chain John Lewis JLP.UL said its sales jumped 27.5 percent year-on-year in the seven days to April 7.

($1 = 0.6269 British pounds)

Editing by Ruth Pitchford

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