LONDON (Reuters) - Manufacturing activity grew at its fastest pace in over 16 years in December and firms’ costs rose at a record pace, suggesting at least one sector of the economy may be ready for higher interest rates before the end of 2011.
The Markit/CIPS manufacturing Purchasing Managers’ Index (PMI) rose to 58.3 in December, its highest since September 1994. The headline figure was above the consensus forecast of 57.0 and November’s downwardly revised reading of 57.5.
The index has been above the 50.0 mark separating growth from contraction since the middle of 2009.
The healthy expansion in activity will be welcomed by the coalition government, which is relying on the private sector to sustain the recovery at a time of deep public spending cuts. But accelerating price pressures will be less welcome, with inflation already more than a percentage point above the Bank of England’s 2 percent target.
“The UK manufacturing sector saw a truly spectacular end to 2010,” said Rob Dobson, senior economist at Markit and author of the survey.
“On the downside, the other stand-out figure was a survey record increase in average input costs. Manufacturers in sectors such as clothing, food products and chemicals were hit hard by demand exceeding supply for certain key inputs, as well as rising energy costs.”
One member of the central bank’s Monetary Policy Committee, Andrew Sentance, has been calling for a rate rise since June, and minutes of the Bank’s latest meeting showed a growing number of members were starting to fret about the pick-up in price pressures.
The survey showed average input costs rose in December at the fastest rate in the survey’s 19-year history, reflecting steep gains in the cost of cotton, food products and energy. Output prices rose at their fastest pace since August and have risen every month for the past year.
“The hawks on the Bank of England’s Monetary Policy Committee will be further unnerved by these rising price pressures,” said Markit’s Dobson.
The Bank has held interest rates at a record low 0.5 percent since March 2009 to help sustain the recovery, despite inflation running well above target.
The central bank believes that most of the above-target inflation is caused by one-off factors, and that a large amount of spare capacity remains in the economy at a time when hefty cuts to public-sector spending and jobs are looming.
Manufacturing only accounts for about 13 percent of economic output.
Money market rates show investors are betting rates will rise towards the end of 2011, at a time when the government’s fiscal tightening will also be felt with increasing force.
The pick-up in activity was aided by growth in both domestic and export orders. The new orders index rose at its fastest rate since May, while export orders rose for a third month running and at a rate just shy of the record level registered last April.
“Manufacturers reported seeing improved client confidence, better market conditions and stronger export sales,” the survey noted.