UK inflation soars past City forecasts
By
Associate Editor
David Stevenson May 13, 2008
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The media is often accused of hyperbole. We journalists might argue, in our defence, that it’s our job to highlight extremes, that it’s the highs and lows that make the headlines.
But on this occasion there’s no need whatsoever for any sensationalizing. The latest UK producer price figures speak for themselves. Indeed they shout so loudly from the rooftops that everyone, particularly the Bank of England’s rate-setting Monetary Policy Committee, needs to sit up and take note.
Because the price of goods leaving British factories rose at a record rate in April, according to today’s release from the Office of National Statistics (ONS), as food and energy costs rocketed. Whilst the latter news will come as no surprise to anyone who has recently had the misfortune to refuel the car or visit the supermarket, these soaring expenses are now finding their way into the official numbers. Factory output prices rose by 1.4% during April, more than twice as fast as expected, driving the annual rate up to 7.5%, the highest since the stats were first compiled by the ONS in 1986.
Even more alarming numerically was the other side of the equation. The cost of raw materials also rose by record amounts, climbing 2.6% month-on-month and an eye watering 23.3% year-on-year, also a country mile ahead of consensus forecasts. Again these were record rises, and alarmingly redolent of the 1970s.
Those of us who can (just) remember the days of such hyperinflation may have thought it had been banished for ever. And in fairness it’s unlikely that we will see a repetition even now, because manufacturing plays such a relatively small role in the UK economy these days.
But danger signs are clearly there. Normally, inflation ‘doves’ love to point to the ‘core’ level of price increases, which excludes food, drink, tobacco and petrol, as this has tended to rise at a much more restrained pace. Yet on this occasion, the doves were in for a big shock. Core output prices advanced a much higher-than-expected 1% over the month to an annualised 4.6%, suggesting that more expensive energy and food aren’t the only reason for the price leaps.
And not to be outshone, the corporate sector weighed in with even more pain. Britain’s biggest energy supplier Centrica, announced it may raise household natural gas and power prices for the second time this year after complaining about “stubbornly high” fuel costs, and suggesting that further industry increases are inevitable.
Clearly the MPC needs to be on full alert. Further near-term interest rate cuts look like they’ve just gone off the menu, certainly in the opinion of several commentators.
'The April producer price data are truly horrible and very worrying indeed for the Bank of England”, says Howard Archer of economic consultancy Global Insight, “raising serious questions as to whether interest rates will be cut from 5% to 4.75% in June despite current signs that the economic downturn may be deepening and widening.'
Capital Economics’ Paul Dales said that while the end-customer may largely sidestep the producer price hikes, 'the consumer slowdown will mean that retailers will be forced to absorb the bulk of these cost increases in their margins. Nonetheless, this data will maintain the MPC’s reluctance to cut interest rates any faster.'
On cue, Scotland’s largest dairyman Robert Wiseman, a supplier to both Tesco and Sainsbury’s, confirmed today that profits were being hit by the company’s inability to pass on to customers the rising cost of both milk and transport.
Of course, the slump in sterling against the euro has been a major factor in lifting import bills. And there was no let up here, with today’s trade figures showing that March imported goods prices leapt by 1.9%, lifting the annualized rate to 10.3%. First quarter import prices for goods excluding oil and erratic items were up by 5.8% year-on-year - the biggest quarterly gain since 1995.
At least the pound rose on the news
Consumer Price Inflation (CPI) is due tomorrow, with the markets looking for slight increase to an annual rate of 2.6%, up from 2.5% in March and compared with the official target of 2%. Then on Wednesday, we’ll hear the thoughts of Governor Mervyn King in the Bank’s quarterly inflation report. It’s probably pie in the sky to expect some last minute rewriting to take account of today’s appalling data - but one can but hope.
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