Inflation fears over factory prices

The prices paid by factories for raw materials have hit a two-year high, prompting new inflation fears.

Economists are warning of the impending risk of rate increases as raw materials hit a 26-month high.

The immediate threat to inflation is being highlighted, as the latest data show that input prices – the raw material costs borne by producers – at factories increased by 13.4 per cent in the year ending January. This was the biggest increase since October of 2008.

Britain’s Office for National Statistics published the latest data and says the painful increase in the prices of raw materials results from the high prices for oil and other imported materials. As a result of the cost squeeze, factories have also accelerated the rate at which they put up their prices.

Producers hiked prices by one per cent in only a month, twice the average rate forecast. Over the last year, factories increased prices by 4.8 per cent, the highest annual rate of increase since May.

The big concern now is that manufacturers could pass a larger component of their cost pressures on to their customers. Such a move threatens to feed the inflationary pressures in the wider economy. Analysts are warning of the effect this would have on the headline inflation rate.

Analysts had expected the annual rate of input price increases to come in at the same rate as December, which was already at a worrying 12.5 per cent. That initial rate has now been revised upwards, to 12.9 per cent.

From December to January, the monthly figure came in at 1.7 per cent. This increase reflected the oil price, as well as the rising cost for imported metals and the other materials needed by factories.