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Last Updated: Monday, 11 February 2008, 10:41 GMT
Producer prices at 16-year-high
A wheat crop
The soaring cost of food 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 5.7% in January, up from 5% the previous month, according to the Office for National Statistics (ONS).

Prices paid by factories for their raw materials surged by 18.7% in the 12 months to the end of January.

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

[These figures] will likely send blood pressures higher at the Bank of England
Howard Archer, UK economist, Global Insight.

Core output price inflation, which strips out the effects of food and petrol, also rose much faster than expected, up 0.8% on the month, the fastest since records began in 1986, and was up 3.2% year-on-year.

'Awful' figures

"The January producer price inflation is really horrible and will likely send blood pressures higher at the Bank of England", said Howard Archer, UK economist at Global Insight.

"[They] further limit the scope of the Bank to cut interest rates aggressively to try and reduce the danger of a sharp economic downturn over the coming months."

As well as higher oil and wheat prices, the fall in the value of the pound in recent months pushed up the cost of other raw materials.

The Bank of England had been hoping that the rise in oil prices would be a one-off shock whose effects would gradually wear off during 2008.

"We had been expecting a further increase in output price inflation but these figures are unequivocally awful," said Philip Shaw, an economist at Investec.

'Inflationary pressures'

The Bank's rate-setting Monetary Policy Committee reduced the key UK interest rate from 5.5% to 5.25% last week amid signs that the economy is slowing.

Forecasters suggest that in 2008 the UK economy will experience its slowest rate of growth for 15 years.

And house prices are also expected to slow dramatically, with signs that mortgage lenders are tightening up on credit conditions.

But the rising prices will alert the Bank's policymakers to the increase of inflationary risks - which could translate into higher wage demands.

The Bank aims to hit the government's consumer price inflation target of 2% and signs of rising factory gate inflation will make it tougher for it to justify further rate cuts, despite the slowing economy.

Meanwhile, the scope for fiscal stimulus seems limited.

The Institute for Fiscal Studies has warned that the government needs to raise taxes by 8bn to meet its fiscal targets over the next two years, after running a large budget deficit during the boom years.



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