Page last updated at 09:13 GMT, Monday, 14 April 2008 10:13 UK

Budget fuels wholesale inflation

Glasses of wine
Taxes on wine, beer and spirits were introduced in the March Budget

UK producer inflation reached its highest rate in nearly 17 years in March, driven partly by Budget hikes in taxation of tobacco and alcohol.

Annual output price inflation was 6.2%, the highest annual rate since May 1991, and up from 5.9% in February, said the Office for National Statistics (ONS).

And prices paid by firms for raw materials rose 20.6% in the past year.

The data comes after the Bank of England cut interest rates to 5% from 5.25% and may cool calls for more cuts.

'Balancing act'

The Bank now has to juggle a slowing economy against warming price pressures.

"The figures serve to underscore the difficult balancing act the Bank of England faces at the moment," said George Johns, an economist at Barclays Capital.

The Bank of England's target is to keep UK consumer inflation within one percentage point either side of 2%.

Figures released in March showed UK consumer inflation reached its highest level in nine months in February, of 2.5%, due to a new method for calculating energy bills.

"Ongoing elevated producer price inflation in March highlights the fact that the Bank of England cannot afford to relax on the inflation front and suggests that the Bank continues to have limited scope to cut interest rates - for now," said economist Howard Archer at the Global Insight consultancy.

'Budget related'

Referring to the ONS producer figures analyst David Page at Investec said: "They're pretty ugly."

"The output price number is the biggest surprise," he added.

"Admittedly some of that is Budget related but it still shows meaningful pressure coming through that is going to feed into the consumer price index over the coming months and clearly vindicates some of the concerns the Bank of England has about the inflation outlook."

The ONS said that if passed on in full, the changes in excise duty on tobacco and alcohol announced in the Budget would have increased the output index by 0.3% in March.

The output price index excluding food, beverages, tobacco and petroleum rose 3.1% in the year to March.

The rise in the input index between February and March mainly reflected a rise in the price of crude oil, said the ONS.

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