Factories bear the brunt of stubbornly resistant rise in the price of oil

Med Omar

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The cost of factory raw materials and overheads have risen at the fastest annual pace in a year, bolstered by a continuing rise in the price of oil, official figures for November showed yesterday.

Input prices were 4 per cent higher than in the same month last year when oil prices were tumbling, according to the Office for National Statistics. The price of goods leaving factories also jumped by 2.9 per cent year on year.

The increases were in line with the expectations of analysts, but they said that factory gate prices were set to rise further in the coming months.

Vicky Redwood, UK economist at Capital Economics, said: “Further rises are likely as last year’s big energy-driven drops in costs fall out of the annual comparison.” The data reinforced expectations that consumer price inflation will pick up in the coming months as the base effect of last year’s drop in oil prices and the looming rise in VAT also filter through into the headline figures.

The Bank of England’s target measure of CPI inflation edged up to 1.5 per cent in October, from 1.1 per cent in September and new figures out on Tuesday are tipped to show that it rose to 1.7 per cent in November. City economists forecast that it could climb as high as 3 per cent in the coming months.

However, the Bank is sanguine about rising consumer prices, indicating that it expects the spike to be temporary. It forecasts that CPI inflation will be about 1.6 per cent at the end of next year, boosting expectations that interest rates will stay at historic lows for some time.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The data does little to alter the view that interest rates will stay down at 0.5 per cent until at least late-2010 and very possibly beyond.” Analysts said that the detail in the producer price data showed that the slowdown in consumer demand was putting a squeeze on manufacturers by curbing their ability to raise prices.

Core output prices, which exclude volatile food and energy prices, fell by 0.1 per cent during November.

“This is an indication that manufacturers’ pricing power is limited. We expect this will remain the case given substantial excess capacity and elevated competition amid still difficult conditions,” Dr Archer said.

The figures came on the heels of dismal data showing that the manufacturing sector was still struggling, most factories expecting output to fall in the coming three months.

But there was a glimmer of good news as a closely watched index from the Paris-based Organisation for Economic Co-operation and Development signalled that the health of the UK economy improved for the ninth month running in October. The index rose to 104.6 in October, up from 103.3 in September. This was 8.8 points higher than October last year. Any reading above 100 indicates that an economy is expanding.

The leading indicator for the wider OECD area rose to 101.4 in October from 100.4 in September and was 5.7 points higher than a year earlier, the OECD said.

• British businesses hold more than £1,000 billion in overseas investments for the first time, according to official figures revealed yesterday.

According to the Office for National Statistics (ONS) the net level of overseas investment abroad was £123 billion higher at the end of last year than at the end of 2007, at £1,039 billion.

However, the net flow of outward investment eased during the year, falling by nearly a half to £86 billion, from a record level of £159 billion in 2007.

The net flow of inward investment to the UK also fell dramatically last year. Some £49.8 billion was invested by overseas companies, down from £93.1 billion in 2007.

Source : times reprique Economics