High costs squeeze manufacturers

Output prices rise as raw materials become more pricey

High oil prices continued to put UK manufacturers under pressure in May, as raw materials are becoming more expensive.

The Office for National Statistics (ONS) said on Monday that the cost of raw materials and fuel for manufacturers rose by 2.2% in May, compared with 0.5% last month.

The May figure was higher than forecast, as was the annual inflation figure of 4.7%.

This shows manufacturers' profit margins continue to take it on the chin

Jeremy Hawkins, Bank of America

In turn, the increase of input costs forced up prices at the factory gate, which climbed by 0.3% from the previous month - the biggest rise since last October.

In April output prices increased only by 0.1%.

A jump of 13.4% in crude oil prices during May - the strongest monthly increase for a year - helped to push up the input costs.

Oil prices, which are 9.7% higher than a year earlier, were only slightly offset by seasonal falls in electricity and gas prices.

Margins under pressure

The data indicate that manufacturer's profit margins are under pressure because the prices they paid for their raw materials rose more quickly than output prices.

"This shows manufacturers' profit margins continue to take it on the chin," said Bank of America's Jeremy Hawkins.

Typically, UK companies struggle to pass on cost rises to their customers because of intense competition in the markets they are selling into.

"We expect the global economy and world trade growth to really slow down this year, so I would be very surprised if manufacturers can pass on the sort of cost increases that we've seen in this data," said Mark Miller, an economist at Morgan Stanley in London.

UK manufacturing recorded its sharpest contraction since January 1999, according to the latest report from the Chartered Institute of Purchasing and Supply (CIPS).

The slump has raised fears that the sector could be on the brink of recession.

The annual rate for producer price inflation, however, remained steady at 0.6%.

The output figures were broadly in line with the forecasts of economists.

'Core' prices

Stripping out volatile food, drink, tobacco and petrol elements - to give a "core" figure - output prices rose by just 0.2% year-on-year, according to the ONS.

During May, the ONS gave a seasonally adjusted figure of 0.1% for the rise in core output prices.

"Although the headline output price figure was a little stronger than expected, the core number remains pretty subdued," said Mr Miller.

The core measure for input prices fell by 0.7% - or a seasonally adjusted 0.5% - on the month leaving it 2.2% up on an annual basis.

Interest rates on hold

Last week the Bank of England left UK interest rates unchanged at 5.25%.

Although the decision was widely expected ahead of the UK general election, some economists were critical.

Ian Brinkley, senior economist at the Trades Union Congress, said the Bank took a risk, arguing that "British manufacturing badly needs a cut in rates to restore confidence".