UK manufacturers raising prices

Exporters have been helped by the weaker pound, the EEF says

Two surveys have found UK manufacturers are continuing to increase their prices as they seek to counter rising costs.

However, the surveys painted differing pictures as to the health of the UK's manufacturing sector.

The EEF manufacturers' group said the sector had defied the recent economic slowdown by reporting its 10th consecutive quarter of healthy growth.

However, the Chartered Institute of Purchasing and Supply said the sector failed to grow in May.

Falling pound

The EEF report said that manufacturers had reported rising domestic orders in the second quarter of 2008.

The pain of raw material price inflation and tighter refinancing is balanced by the gain of a weaker pound for exporters Bob Hale, Grant Thornton

Export orders had remained "relatively strong" helped by the fall in the value of the pound, although there were some signs of weakening which the EEF said may be due to the slowdown in the US.

However, there were also worrying signs on the inflation front, with the study also finding that firms had increased prices to counter the combination of higher raw material, energy, component and freight costs.

The EEF added that profit margins had been squeezed, as firms had not been able to pass on all of the higher costs.

However, overall the EEF said that the survey's results had led it to raise its growth forecasts for the sector for 2008.

It now expects manufacturing to grow by 0.9% this year, with engineering to expand by 1.3%.

"The pain of raw material price inflation and tighter refinancing is balanced by the gain of a weaker pound for exporters," said Bob Hale, head of manufacturing at Grant Thornton, which prepared the report with the EEF.

Inflationary pressures

The latest monthly CIPS survey painted a less rosy picture of the sector, however, with a fall in new orders meaning the sector failed to grow last month.

Warning bells will be ringing for the Bank of England's embattled Monetary Policy Committee Hetal Mehta, Ernst & Young ITEM Club adviser

The CIPS purchasing managers' index fell to 50 in May, from 50.8 the month before.

An index figure over 50 signifies expansion, and May's result is the first time the index has failed to show growth since July 2005.

The CIPS study found that weak domestic market conditions were the main reason for the fall in orders, unlike the EEF report.

However, the CIPS report also found that firms were continuing to pass on higher costs in the form of higher prices, with the output prices index rising to 62.

"Purchasing managers in the sector continued to face record inflationary pressure, which they tackled by curbing input buying activity and passing soaring fuel, transportation and food costs on to clients," said Roy Ayliffe, director of professional practice at CIPS.

Hetal Mehta, economic adviser to the Ernst & Young ITEM Club, said the findings would be worrying news for the Bank of England.

"With the output price index hitting a series high, and input prices still increasing rapidly, warning bells will be ringing for the Bank of England's embattled Monetary Policy Committee since inflation is already above target and inflation expectations are also on the up."