April 9, 2010 / 9:08 AM / 9 years ago

Factory gate inflation rises sharply

LONDON (Reuters) - Factory gate inflation jumped more than expected to a 16-month high in March, raising doubts that consumer price pressures will subside as fast as the Bank of England expects.

A chimney is seen at an industrial site on Teesside, northern England February 8,2009. REUTERS/Nigel Roddis

The Office for National Statistics said producer output prices rose 0.9 percent on the month, more than twice the jump analysts had forecast, for an annual rise of 5.0 percent — its highest since November 2008.

The pound rose to a seven-week high against the euro and interest rate futures fell as investors placed bets Britain’s central bank would raise borrowing costs before the end of the year.

“March’s surprisingly strong rise in UK producer prices will prompt some concern that pipeline inflation pressures are building,” said Jonathan Loynes at Capital Economics.

The Bank of England targets consumer price inflation which is currently running a full percentage point above the bank’s 2 percent target.

Bank Governor Mervyn King is confident that the large amount of spare capacity in the economy will push inflation back below target later this year, although minutes to the central bank’s March meeting noted a weakening currency did pose risks to this scenario.

The pound fell sharply in the first two months of this year, hurt by fears over the strength of the recovery and the government’s ability to tackle a record budget deficit. Sterling’s trade-weighted index has rebounded since the start of the month but remains some 25 percent below its mid-2007 peak.


The rise in factory gate prices was led by petroleum products, which added more than two percentage points to the annual rate and are up by a quarter since a year ago.

The cost of a barrel of oil has doubled in dollar terms over the past year and is still on the rise. Brent crude hit a 17-month high above $86 a barrel this week.

Moreover, annual gains were registered in all categories, suggesting many manufacturers are taking advantage of the recent pick-up in growth to pass on at least some of their higher energy bills.

Core producer output price inflation, which strips out food, beverages, tobacco and petroleum products, rose by an annual 3.6 percent, its highest rate since February 2009.

While many economists still expect price pressures to ease over the year, some questioned whether consumer price inflation would fall as fast as the central bank hoped.

“I think there are genuine signs here that we will see a slower pace of deceleration in the CPI numbers than we thought previously,” said Alan Clarke, UK economist at BNP Paribas.

There was also a sharper-than-expected jump in input price inflation, which rose 10.1 percent on the year, up from 7.5 percent in February and the biggest annual jump since October 2008.

Higher crude oil prices accounted for around 95 percent of that annual rise. On the month, crude oil prices rose 9.7 percent and imported metals were up 5.3 percent, the biggest monthly jump since records for that category began in February 1991.

Editing by Susan Fenton

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