Page last updated at 12:02 GMT, Monday, 8 September 2008 13:02 UK

Factory prices down on oil relief

Car production line
Manufacturers cut prices last month for the first time in almost two years

The price of goods leaving UK factories fell in August at their fastest monthly rate since records began in 1986, thanks to falling oil and metal prices.

The Office for National Statistics said factory output prices were 0.6% lower in August than in July after a 2% fall in the cost of raw materials and fuel.

Manufacturers prices were still 9.7% higher than a year earlier, with crude oil costs 65% higher than August 2007.

The figures have raised expectations that UK inflation will begin to slow.

The greatest factor behind the fall in manufacturers' costs was the 11% drop in world oil prices between July and August - the largest monthly fall since January 2007, when oil prices fell by 12.2%.

Oil prices have come back from $147 a barrel at their peak in July to about $107 a barrel.

Overall, today's news will go some way to convincing the Bank of England's Monetary Policy Committee that the greatest threat to the UK is from weakening demand and not rising inflation
Paul Dales, Capital Economics

Home produced food costs also declined due to a 10% drop in the price of feed and milling wheat.

But this was not reflected in the price of food products leaving the factory gate, which rose by 0.9% in the month and 12.5% in the year to August - the fastest pace since 1986.

Excluding volatile items such as food, alcohol, tobacco and petrol, selling prices fell by a seasonally adjusted 0.1%, boosting hopes that the fall could be a sign that inflation risks have peaked.

Inflation peak?

Consumer prices have been soaring in recent months as manufacturers passed on the surging cost of oil, gas and raw materials.

With inflation double the government's target of 2%, the Bank of England has been unable to cut interest rates to give the flagging economy a much-needed boost.

Earlier this month the Bank of England's Monetary Policy Committee held interest rates at 5% despite evidence suggesting that the UK economy is heading for recession.

But the first fall in producer prices for 21 months, in addition to a decline in input costs, has raised hopes that an interest rate cut in the near future may now be more likely.

"Overall, today's news will go some way to convincing the Bank of England's Monetary Policy Committee that the greatest threat to the UK is from weakening demand and not rising inflation," said Paul Dales at Capital Economics.




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