Producer input prices rise by 13.4% – the biggest year-on-year gain since 2008 – after sharp increases in cost of commodities
The price British manufacturers pay for raw materials surged at the fastest annual rate for more than two years in January – fuelling concerns that mounting pressure on consumer prices could force an early rise in interest rates.
Sharp increases in the cost of oil, food, imported metals and other materials pushed the annual rise in producer input prices to 13.4%, the Office for National Statistics has reported. This is the biggest year-on-year gain since October 2008.
The main factor in the increase was a near-29% jump in the price of crude – the largest increase since last May. Following the upheavals in Egypt, oil prices have climbed to $102 a barrel. Prices of imported metals leapt 26.4% last month over 2010 levels, while other imported materials rose 11.4%. Food costs climbed 11.2%.
The figures are likely to worry the Bank of England, as the increase in raw materials costs is expected to feed through to consumer prices. Consumer price inflation hit 3.7% in December, nearly twice the Bank's 2% target, and January's increase in VAT is expected to push the cost of living even higher. The Bank's governor, Mervyn King, estimated last month that inflation would hit 5% in the coming months before falling back next year.
"While these figures probably don't tell us much about next Tuesday's consumer price index [CPI] – which is going to be all about the extent of the VAT pass-through – these figures do highlight upside risks to inflation in the medium term," said Alan Clarke at BNP Paribas. "The experience of the clothing component of the CPI, among others, is that firms have then passed these higher costs to consumers. We are getting to the point where the Bank will struggle to get away with labelling these higher upstream prices as one-offs that will drop out of consumer price inflation further down the road."
The figures also showed that factory-gate prices – the amount manufacturers charge for their goods – climbed 4.8% in the last 12 months, the highest annual rate since May.
The Bank of England decided to keep its base rate at 0.5% on Thursday for the 23rd month in a row, but City economists expect borrowing costs to start rising later this year – some believe by as early as May. The Bank's eagerly awaited quarterly inflation forecasts, released next Wednesday, will provide an opportunity for policymakers to set out their thinking and could prepare the ground for a rate rise.
"January's producer-prices figures provide a timely reminder that, despite yesterday's decision to keep rates on hold, the risk of a near-term hike in interest rates remains very much alive," said Samuel Tombs, UK economist at Capital Economics, although he thinks that the latest increases in producer prices will take about a year to feed through to high-street prices.
Last week Charles Bean, the Bank of England's deputy governor, said that the global boom in commodity prices might force a rise in interest rates.
David Kern, the chief economist at the British Chambers of Commerce, said there was nothing the Bank could do in the short term to prevent a temporary increase in inflation.
"We accept that interest rates will probably need to rise later this year," he said. "But it is important for the monetary policy committee to wait until the initial impact of the austerity measures has been absorbed. At the current time, we should be concentrating on growth-supporting policies and ensuring the recovery is sustained."