The Herald

UK manufactur­ers pile on pricing pressure

Results of CIPS survey may compound inflation problems for Bank of England interest rate-setting committee

- IAN McCONNELL ian.mcconnell@theherald.co.uk

INFLATION alarm bells rang loudly yesterday when a surve y r e ve a l e d U K m a n u - facturers are pushing through the steepest hikes in prices since comparable records began in 1999.

This survey, from the Chartered Institute of Purchasing a n d S u p p l y, is l i ke l y t o unnerve members of the Bank of England’s Monetary Policy Committee.

It will reinforce City expectatio­ns that the MPC will hold UK base rates at 5.25% at the end of its next two-day ratesettin­g meeting at noon on Thursday.

However, it also highlights potentiall­y significan­t inflation dangers in future interest-rate cuts which are viewed as necessary by economists to help counter a sharp slowdown in UK growth, which appears to be under way already and has its roots in US housing market troubles. MPC members look increasing­ly to be on the horns of a dilemma.

Bank of Scotland declared yesterday that a survey conducted last month showed seven out of 10 owners of small businesses north of the Border wanted a cut in interest rates on Thursday. CIPS’ survey underlines the near-certainty that they will be disappoint­ed.

The continuing surge in oil prices is likely to add further to worries about inflation.

Benchmark US light crude yesterday touched a fresh record high of $103.95 a barrel – well ahead of the previous all-time peak of $103.05 hit during trading on Friday.

It eased to end the openoutcry session on the New York Mercantile Exchange at $102.55 a barrel, still up 71 cents on Friday’s close.

Benchmark Brent hit a record high of $102.29 a barrel during yesterday’s session.

Oil was one of the factors highlighte­d by manufactur­ers surveyed by CIPS as they reported that their input costs had last month risen at the fastest pace since November 2004. The continuing surge in crude looks to spell further potential trouble on this score.

CIPS’ index of manufactur­ers’ output prices meanwhile rocketed from 57.9 in January to 59.9 last month – the highest since comparable records began in 1999 and way above the 50 no-change mark.

Its purchasing managers’ index for manufactur­ing, a composite measure of activity in the sectorwhic­h takes in the likes of output, new orders and employment, ticked up from 50.7 in January to 51.3 in February but is neverthele­ss signalling anaemic expansion.

CIPS’ sur vey paints an unhappy picture of mounting inflation and weak growth.

The MPC has cut UK base rates by a quarter-point twice so far this cycle, on December 6 and February 7. A poll by news agency Reuters last week showed the median expectatio­n of economists is that base rates will end 2008 at 4.5%. However, the surge in factorygat­e prices signalled by CIPS’ survey underlines the point that even this extent of monetary loosening is far from a foregone conclusion.

Paul Dales, at consultanc­y Capital Economics, noted CIPS’ output prices index was well above the maximum which appeared consistent with the Bank of England’s 2% target for annual consumer prices index inflation.

Dales said the survey “dealt a blow to MPC hopes that a sharp economic slowdown will keep inflation at bay”.

He added: “The jump in the prices-charged balance … is consistent with a further rise in the official measure of core producer output price inflation from January’s reading of 3.2% to around 3.5% – well above the levels consistent with the 2% inflation target.

“With the input-prices balance having risen to its second highest level in 13 years, it is not too startling that manufactur­ers are keen to pass on higher costs.

“But it is surprising that producers are raising their prices so rapidly when the activity environmen­t is so weak.”

Dales said, with manufactur­ers’ pricing power so strong, “it is looking more and more likely that the MPC will have to generate a very sharp slowdown in activity on the high street in order to force retailers to absorb higher costs in their margins”.

He added: “This survey supports other evidence suggesting that inflation concerns will prevent the MPC from cutting interest rates any faster.

“While we still think interest rates will eventually fall to around 4%, they are likely to be left on hold later this week, and perhaps in April too.”

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