By Daniel Pimlott, Economics Reporter
Published: March 5 2010 12:08 | Last updated: March 5 2010 12:08
The prices of goods leaving UK factory gates rose at their fastest in 14 months in the year to February and at more than double their average rate than over the past decade, according to official figures published on Friday.
The Office of National Statistics reported that manufactured output prices as measured by its producer price index rose by 4.1 per cent in the year to February, up 0.3 percentage points from an inflation rate of 3.8 per cent in January.
That is the highest rate since December 2008 – a time when prices were levelling off following a surge in commodity prices early in the year and as the global recession accelerated. In the past ten years, output prices have averaged just below 2 per cent annual inflation.
Cutting out volatile elements like food, alcohol and petrol products, the index rose by 2.9 per cent in the year to last month, up from 2.6 per cent in January.
The stronger rises in the prices of manufactured goods has come after the pound has fallen by about 25 per cent against other currencies since the financial crisis kicked in in 2007. This has driven up the costs of imports.
“We still believe that most of the recent strength in core inflation reflects the lagged effects of sterling’s past depreciation during 2008. Ultimately, this effect will fade over time,” said Colin Ellis, economist at Daiwa Europe.
It has also come as the global economy enters the early stages of recovery from its worst post-war recession.
The increases in the past year have come amid a big pick up in petrol prices – which were up 20 per cent in the year to February, after plunging earlier during the recession.
Although producer prices do not map directly to high street prices, the rise in manufacturers costs will have fed through to consumers. Annual inflation as measured by the CPI was at 3.5 per cent in January – well above the Bank of England’s 2 per cent target, and confounding fears that the recession could end in deflation.
The Bank is sanguine on inflation, believing that the current rise in prices is a temporary blip because of a rise in VAT and the feed through from the weaker pound, and that ultimately weak demand will lead to below target inflation in the medium term.
However, a recent further decline in sterling is likely to put upward pressure on prices.
“The evidence suggests that manufacturers are trying to take advantage of some recent limited improvement in activity to push through price increases and support their margins in the face of recently rising input costs,” said Howard Archer, economist at IHS Global Insight.
“Even so, manufacturers have only been able to pass on some of their higher costs with the result that their margins have been squeezed significantly recently.”
However, there were signs that price pressure on manufacturers might be easing, as input price inflation dropped for the first time in seven months to 6.9 per cent year on year, compared with a 7.7 per cent rise in January. Input prices have been hit by a 54.5 per cent rise in crude oil prices over the year, although oil prices fell 0.7 per cent over the month, and annual inflation is down from 67 per cent in January.
“Provided that oil prices stay roughly where they are, input price inflation should fall further over the coming months,” said Jonathan Loynes of Capital Economics.
