Page last updated at 13:29 GMT, Monday, 9 June 2008 14:29 UK

Producer price growth at record

Nissan factory in Sunderland
Producers have to pay more for raw materials, so their goods are pricier

UK producer prices rose at a record pace in May, official figures show.

Prices jumped by 8.9% from the same month a year earlier, the Office for National Statistics said. Input prices also shot up, 27.6% higher on the year.

The quickest growth since records began in 1986, it was driven by higher food, scrap metal and energy costs.

The data was much worse than analysts had expected, and came amid signs that the UK's economic growth is slowing and consumer confidence is crumbling.

A survey from the British Retail Consortium on Monday claimed that consumer confidence in the UK had tumbled to a record low due to rising prices and falling property values.

'Absolutely horrendous'

The worry for many observers is that accelerating inflation will see the Bank of England delay cutting interest rates, and may even force them to move borrowing costs higher.

Subjected to the same challenges, the European Central Bank last week hinted that the next move for eurozone rates could be up, despite increasing evidence that the region's economy is running out of steam.

Jonathan Loynes, an economist at Capital Economics, called Monday's UK producer price figures "absolutely horrendous".

"The increases are now so large that at least some portion of them looks likely to work its way into the High Street, even if retail sales slump," he said.

Last week, the Bank left its main interest rate unchanged at 5%.

Inflation risks

Core output prices, which excluding food, beverages, petrol and tobacco, rose by 5.9% over the 12 months to May, sparking concern that inflation is spreading beyond the food and energy sector.

On a monthly rate, the core prices rose by 1.2%, the quickest increase in almost three decades.

We hope that some of the strength can be explained by a once and for all pass-through of sterling's weakness
Philip Shaw,
Investec

Companies are caught in a tricky position because they either have to pass on their higher costs to consumers or watch their margins and potential profits shrink, analysts said,

A number of airlines, and food firms have started to push up their prices in response to the surging raw material costs, but many are resisting for fear of losing customers.

At the same time, many workers in both the public and private sectors are demanding higher wages to help offset the increasing cost of living.

"To cut interest rates further, we suspect that the Bank will want clear evidence that wage moderation is continuing and that reduced demand is increasingly undermining companies' pricing power," said Howard Archer of Global Insight.

Weak pound

Inflationary pressures are not being helped by a decline in the value of the pound against the euro, and a strengthening of the US dollar.

Analysts said that the unexpected jump in producer prices may be down in some part to a dip in the value of the UK currency.

"We hope that some of the strength can be explained by a once and for all pass-through of sterling's weakness," said Philip Shaw, chief economist at Investec.

However, he said that whatever the main reasons behind the increase, it gives a clear impression of why the Bank of England "is likely to find it impossible to cut interest rates this year".


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