June 1, 2007 / 9:04 AM / 13 years ago

Manufacturing picks up unexpectedly in May

LONDON (Reuters) - Manufacturing activity accelerated unexpectedly in May, with factory gate inflation picking up to equal a record high, a survey showed on Friday, reinforcing expectations interest rates will rise again soon.

In this file photo smoke rises from an incineration plant in Cheddleton, central England, February 5, 2007. Manufacturing activity accelerated unexpectedly in May, with factory gate inflation picking up to equal a record high, a survey showed on Friday, reinforcing expectations interest rates will rise again soon. REUTERS/Darren Staples

The Chartered Institute of Purchasing and Supply/NTC purchasing managers’ index rose to 54.9 last month from an upwardly revised 54.1 in April. Analysts polled by Reuters had expected a slight easing to 53.7.

A reading above 50.0 indicates expansion, while anything below marks a contraction.

The Bank of England is likely to be concerned to see the CIPS/NTC index measuring output price growth nudging higher to equal February’s series high of 56.9.

“This is going to keep upward pressure on interest rate expectations, although we continue to favour a July move rather than a hike next week,” said James Knightley, an economist at ING.

Policymakers, currently battling to get inflation back to its 2.0 percent target, have said they are on the lookout for any signs that manufacturers are ramping up prices to repair profit margins damaged in last year’s energy price spike.

Inflation spiked above 3 percent in March to hit its highest rate since comparable records began a decade ago. While price growth has eased since then, strong factory gate inflation may drive prices on the high street skywards again.

Financial markets are pricing in the possibility that the central bank may have to raise interest rates to as high as 6 percent to combat price pressures, having already hiked rates four times since last August to 5.5 percent.

Markets, which took the hawkish data in their stride, have not ruled out the chance rates could rise when the Bank’s Monetary Policy Committee meets again next week.

PRICE PRESSURES BUILDING

Manufacturers may be raising prices in response to the return of a pick-up in the cost of raw materials. The CIPS/NTC index measuring input price growth hit its highest since September, up to 64.8 in May from 63.3 in April.

Oil prices have traded above $70 a barrel again in recent weeks, having fallen from record highs near $80 reached last summer to around $50 in January.

An acceleration in output helped the overall manufacturing activity index to push higher, as a tentative industrial recovery continues. The index measuring production rose to 57.5 from 57.3 in April, its strongest since September.

“It’s an encouraging survey, in line with other business surveys, and it does suggest that official data will pick up,” said Mark Miller, an economist at HBOS.

Official manufacturing data for April is due next Friday.

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