Sharp rise in UK producer prices pushes up sterling
The pound climbed to within a whisker of the symbolic $2 mark after a sharper than expected rise in producer prices made a further hike in interest rates increasingly likely.
A survey last week from the the British Chambers of Commerce had claimed that the ability of companies to raise prices had been “exaggerated”.
But data released on Monday by the Office for National Statistics showed firms had been able in March to bump up charges to customers at the fastest pace in nearly a year.
The pick up in factory gate inflation is unwelcome news for the Bank of England.
The Bank’s monetary policy committee will be concerned that the data shows inflationary pressures building at the beginning of the supply chain and that this may make it more difficult to bring consumer price inflation down to its 2 per cent target from the current 2.8 per cent.
Richard McGuire at RBC Capital Markets said: “While often overshadowed by the proximity of the more impactful CPI report [due on Tuesday], these data arguably enjoy a greater than usual degree of importance given the Bank of England’s current focus upon evidence of firms’ pricing power.”
“Against this backdrop, the sharp jump in headline output prices tilts the odds further in favour of the Bank raising rates at the May meeting.”
With investors still hoping that the next move in US interest rates will be down, the divergent trend in yield between the two currencies helped sterling gain ground against the dollar, rising to $1.9935 by mid-morning.
The Bank last raised rates in January to 5.25 per cent. Minutes of the April rate-setting meeting will be released on Wednesday.
The ONS said that output prices rose by 0.6 per cent between February and March - the sharpest month-on-month rise since April 2006 - mainly on the back of a 10.9 per cent increase in recovered secondary raw materials, particularly scrap metal.
Petroleum product prices were up 2.2 per cent as aviation fuel and fuel oil rose by 3.9 per cent and 3.5 per cent respectively.
Output prices for the year to March were up 2.7 per cent. This was higher than the 2.3 per cent increase seen in February and was the sharpest rise since August last year.
Pressure on manufacturers to raise prices came from a rebound in raw material costs. Crude oil rose by 8.2 per cent in the month to March said the ONS, and this contributed to a 1.2 per cent rise in input prices on a seasonally adjusted basis.
For the year to March, input prices climbed by 0.7 per cent.
Howard Archer at Global Insight said the jump in input prices meant the pressure on companies’ profit margins was intensifying.
And he noted that the Bank would be alarmed to see that core producer output prices - a measure excluding volatile items such as food drink, tobacco and petrol - was up by 0.4 per in March, marking the highest monthly increases since April 2006.
“Furthermore, annual core producer output price inflation climbed to a nine month high of 2.9 per cent.”
Source: ft.com
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