High input costs adding to manufacturing sectors woes

Rising Input Costs to Worry BoE

Rising Input Costs to Worry BoE

Bank of England has reasons to worry about spiraling inflation as latest data shows that prices of crude oil and foods have risen fastest in December since August last year.

Consensus is slowly building up over a possible rate hike by as early as May 2011, as falling returns from bond markets start hurting investors and higher food and energy prices begins to hurt households.

The Office of National Statistics said cost of raw materials and fuels rose by 12.5 percent for the twelve months period till December 2010. Producer output prices till December jumped by 4.2 percent, up from 4.1 percent recorded in November, 2010.

Input costs have risen by 3.4 percent in December alone, nearly double than what economists had expected. Core input prices – which exclude food, fuel, drink and tobacco prices, had risen by 8.7 percent in the twelve months till December – highest since February 2009.

However, core output prices surprisingly moved in the opposite direction and actually dropped by 2.9 percent, lowest since April 2010; clearly indicating that manufacturers are absorbing the impact of high input cost.

“There’s clearly a squeeze on manufacturers’ profit margins and firms will feel pressure to pass further cost increases on in coming months, especially as there seems to have been no let-up in the rising price of many commodities in recent weeks”, according to economist Chris Williamson of Markit.

The Purchasing Managers Index (PMI) data compiled by Markit shows input costs are on a 19 year old high for the manufacturing sector.

“These data will therefore add to calls on the Bank of England to raise interest rates to cool inflationary pressures”, added Mr. Williamson.

“The producer price data will do little for the Bank of England’s peace of mind. The data show mounting inflationary pressures in the supply chain”, said Howard Archer of IHS Global Insight. “With manufacturing activity seemingly still buoyant at the moment and input prices surging, the risk is that producer prices could rise significantly further in the near term at least. Further out, the hope for the Bank of England is that significant excess capacity and likely slower expansion will put a lid on prices, hopefully along with moderating input prices”, he added.

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