From the FT:
Factory gate inflation has hit double-digit figures for the first time in more than 20 years, underlining the strong price pressures in the economy that have stopped the Bank of England cutting interest rates.
Economists said the year-on-year increase of 10 per cent in the prices charged by manufacturers increased the risk of a knock-on effect on consumer price inflation, the measure the Bank uses to decide monetary policy.
The figures preceded Tuesday’s release of consumer price inflation figures, which are usually affected by factory gate inflation because they push up retailers’ costs. Economists polled by Reuters expect the annual rise in consumer prices to accelerate from 3.3 per cent in May to 3.6 per cent in June, far above the Bank’s 2 per cent target.
Factory gate inflation rose from an annual rate of 9.3 per cent in May, the Office for National Statistics said. Costs for fuel and raw materials increased 30.3 per cent in the year to June – also the highest in more than 20 years. This was chiefly because of the near-doubling of crude oil prices.
Vicky Redwood at Capital Economics said: “These data underline why the monetary policy committee is unlikely to cut interest rates in the next couple of months, even though the economy is weakening fast.”
Ross Walker, economist at the Royal Bank of Scotland, said: “Pipeline pressures remain substantial and overall, these data reinforce the likelihood that Bank rate will remain on hold for some time.” But in spite of the rise in inflation for factories’ input and output prices to the highest annual rate since the series began in 1986, the monthly increase in manufacturers’ costs and selling prices was smaller than analysts had expected.
Factory gate prices were up 0.9 per cent on the month, and manufacturers’ input costs climbed 2.3 per cent. But revisions to previous months’ data and other technical factors pushed up the annual increase.
The Bank has made clear it can do little to avert the short-term spike in inflation, but has signalled it will watch for any signs of price pressures driving up wage settlements, which in turn boost inflation in the long term.
Michael Saunders, economist at Citi, said a further jump in the prices manufacturers were charging for food and petrol products could feed quickly into the consumer price index. He added that global cost pressures would be magnified by the weak pound pushing up import prices.
“The widespread and powerful inflation pressures evident in the producer price data are likely to be reflected in a large and extended overshoot of the CPI inflation target in the next two to three years,” he said.
The steady rise in manufacturers’ input prices has brought them 69 per cent higher since January 2004, according to Citi – ramping up the pressure on consumer prices.
In contrast, input prices fell by 2 per cent between January 1986 and January 2004.