Output inflation accelerated in January

Factory Gate Inflation Remain a Cause for Worry

Factory Gate Inflation Remain a Cause for Worry

Bank of England may be forced to raise interest rates sooner than later as input costs rose fastest in two years triggering factory gate prices to jump as well, recent data shows.

The bank’s policymakers will be worried to note that pipeline inflation is still building up and the consumer price inflation – already nearly twice the bank’s target of 2 percent, is showing no signs of abating, latest figures suggest.

Producer input prices grew 13.4 percent in January on the year, well above the forecasted annualized rate of 12.6 percent and the biggest rise seen since October 2008, data released by the Office for National Statistics show.

Factory gate output inflation was registered at 4.8 percent on the year, well above the forecasted rate of 4.4 percent and highest since May 2010.

A hike in Value Added Tax (VAT) and the global surge in oil and commodity prices may drive the consumer price inflation above four percent – data of which is expected to be published next week.

Alan Clarke – economist at BNP Paribas said: “I don’t think it tells us much about next week’s CPI, but what it does tell us is that elevated inflation is increasingly likely to become engrained in the system further down the road”. In which case “It reinforces the case for higher rates”, he added.

The biggest driver of input costs has been crude oil, which has registered an annual price growth of 28.8 percent, highest since May 2010. Rising cost of metal and minerals also contributed to inflation.

The Bank of England is trying to maintain a fine balance and has kept rates at their lowest of 0.5%, lest higher rates derail a weak economic recovery. However, the market is skeptical at the bank’s ability to keep rates low and has factored in a quarter percent rate hike by May 2011.

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