August 8, 2005

Steepest rise in manufacturing costs for 20 years

by brian_turner

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According to the Office for National Statistics (ONS), in July raw material costs rose at their fastest annual rate for 20 years. Producer input prices increased 1.8% between June and July, giving an annual increase of 13.4%.

The rise was mainly due to the soaring cost of oil, which recently reached its highest ever level.

The price of goods leaving UK factory gates increased by 0.7% in July, boosting the annual rate of factory gate inflation to 3.0%, a significant increase from 2.5% in June and more than 2.4% forecast by analysts. It is also higher than a target of 2.0% set by the Bank of England.

While the Bank of England said it expects rising oil prices to drive up inflation in the short term, Howard Archer, an economist at Global Insight, said it was “a worryingly larger jump than expected in producer prices”.

According to Mr Archer, it raises concerns that manufacturers are finding it increasingly difficult to absorb higher input costs, and these are, therefore, starting to increasingly feed through the supply chain.

Mr Archer said that with oil prices reaching record levels in early August, there were indications of an increase in underlying inflationary pressures which made it unlikely the Bank of England would cut interest rates again in the near future.

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