Factory figures 'unequivocally awful'

Price inflation reaches 5.7%, highest in 16 years, making interest rate cut less likely

EXPECTATIONS of further imminent interest rate cuts took a blow yesterday with news that factory gate inflation hit its highest level in more than 16 years.

The Office for National Statistics (ONS) said output prices rose 1 per cent month-on-month in January, taking the annual rate of inflation to 5.7 per cent from 5 per cent in December.

That is the sharpest increase since August 1991, and adds weight to the Bank of England's warnings over inflation risks.

The data comes ahead of today's consumer price index (CPI) figures, which are likely to show inflation remaining ahead of target for a fourth consecutive month.

Philip Shaw, an economist at Investec, said: "We had been expecting a further increase in output price inflation but these figures are unequivocally awful."

Howard Archer, Global Insight's chief UK and European economist, said the upturn in factory gate prices would limit the central bank's scope to reduce borrowing costs.

"The January producer price inflation figures are really horrible and will likely send blood pressures higher at the Bank of England," he said. "The data reinforce concerns about upside inflation risks and further limit the scope of the bank to cut interest rates aggressively to try to reduce the danger of a sharp economic downturn over the coming months."

Manufacturers' input costs soared 18.9 per cent over the year to January, the strongest rate since records began 22 years ago. Oil prices rose by 70.3 per cent over the year – the highest annual rate of increase since 2000 – while surging wheat costs have led to a 36 per cent rise in food prices.

Archer added: "This jump in input prices maintains pressure on manufacturers to try to raise their prices. The Bank will be desperately hoping that slowing activity will dilute manufacturers' pricing power."

Economists forecast that January's CPI inflation rate will have edged up to 2.3 per cent, well ahead of the Bank of England's 2 per cent target.

Bank Governor Mervyn King has already warned there is a risk inflation could rise to well above 2 per cent this year.

Interest rates were trimmed a quarter percentage point last week to 5.25 per cent to help shore up economic growth. A further rise in inflation would reduce the bank's ability to take rate-cutting action over the coming months.

The bank is due to publish its latest quarterly forecast on inflation tomorrow.

Separate ONS figures published yesterday showed that the UK's goods trade gap with the rest of the world stood at just under £7.6 billion in December, higher than the £7.4bn reading expected by analysts. That took the trade gap for 2007 as a whole to a record £87.4bn, against £77.4bn in 2006.