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Last Updated: Monday, 10 December 2007, 12:18 GMT
Steep rise in UK producer prices
A wheat crop
The soaring cost of grains is being passed on down the supply chain
Price inflation of goods leaving UK factories has reached its highest rate in 16 years, driven higher by petrol and food costs, official figures show.

Annual output price inflation reached 4.5% in November, up from 3.8% the previous month, according to the Office for National Statistics (ONS).

This is the highest rate of factory gate price inflation since August 1991, when it reached 5.2%.

Analysts said this could hold back the Bank of England from further rate cuts.

The Bank of England continues to face a difficult job in juggling rising near-term inflationary pressures and a slowing economy
Howard Archer, chief economist Global Insight

'Inflationary pressures'

The Bank's rate-setting Monetary Policy Committee reduced the key UK interest rate from 5.75% to 5.5% last week amid signs that the economy is slowing.

But the sharp rise in prices manufacturers are charging for their produce will alert the Bank's policymakers to the increase of inflationary risks.

The Bank is tasked with hitting the government's consumer price inflation target of 2% and signs of rising factory gate inflation will make it tougher for the Bank to justify further rate cuts.

Global Insight's chief European economist Howard Archer said the latest figures showed that "inflationary pressures are still building up down the supply chain".

"The Bank of England continues to face a difficult job in juggling rising near-term inflationary pressures and a slowing economy," he added.

Price headache

The ONS said annual inflation of input prices, which measures the amount that manufacturers have to pay for materials and fuel, rose by 10.2% in the year to November, up from 8.5% in October.

The figures indicate that manufacturers were unable to absorb these rising input prices. Output prices of petrol products climbed 18.5% in the year to November, the largest rate of increase since July 2000, when it was 20.1%.

Meanwhile, a sharp rise in the price of fresh bread and cakes drove up annual food price inflation to 6.6% - the fastest pace of increase in 14 years.

The figures overshadowed the news that annual core producer price inflation - which strips out food, fuel, tobacco and alcohol - fell to 2.2%, down from the previous month's figure of 2.3%.

Analysts will now turn their attention to the latest consumer price inflation figures, due out next week, which will give a stronger indication of the inflationary pressures in the UK economy.

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