Factory-gate inflation rises unexpectedly

The rise is likely to put further pressure on the Bank of England to raise interest - but will it work?

by Emma Haslett
Last Updated: 06 Nov 2012
Figures released today by the Office for National Statistics have shown a surprise rise in factory-gate inflation. It went up by 0.2% to 4.2% in December – its highest level since April last year. Analysts have put the jump down to a rise in input prices, which have gone up to 12.5% after the cost of raw materials – particularly fuel and home-produced food materials – rose by record levels last year. After yesterday’s decision to keep the interest rate at 0.5%, these latest figures are going to add even more weight to the argument to raise it. The question is, how much would that help?

Factory-gate inflation is the measure of the price charged by manufacturers for goods without the additional mark-ups added by retailers. Despite the expectation that higher input costs would impact the cost of production, a slowdown in labour costs had been expected to stabilise the cost of manufacturing – but, with crude oil rising by 26.2% on a year ago (its highest annual jump since May), that didn’t materialise.

With RPI and CPI both well above Government’s target of 2%, these figures could well add to calls for the Bank of England’s Monetary Policy Committee to raise interest rates, which would (theoretically) help to stem inflation. Yesterday, the MPC decided to hold the rate at 0.5% for the 22nd month in a row, on the basis that inflation should come down of its own accord as the economy begins to recover. But a split has emerged in the MPC, with some factions, led by economist Andrew Sentance, beginning to see the advantages of bringing up rates sooner, rather than later.

So how will these figures affect that argument? While it will certainly add to pressure on the BoE to, some analysts believe that a higher interest rate might not do much to curb factory-gate inflation. ‘This is primarily an oil and commodity price effect,’ says Peter Dixon at Commerzbank. So a rate hike probably won’t do very much to reduce the cost of production – ‘it’s a global problem’.

So, as we pointed out yesterday, it’s probably a good idea for the bank to hold tight for now. But the pressure’s mounting for a rise, and while this might be a bit of a red herring, the likelihood is that those batting for team Sentance will get their way in the not too distant future.

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