Hopes for a cut in interest rates were more or less snuffed out yesterday after it emerged that UK producer prices last month surged at their fastest pace in at least 22 years, raising fears the nation was now hurtling head-long into recession.
Hopes for a cut in interest rates were more or less snuffed out yesterday after it emerged that UK producer prices last month surged at their fastest pace in at least 22 years, raising fears the nation was now hurtling head-long into recession.
As the price of crude oil continued to climb toward a once-unthinkable $150 a barrel, it is now clear that rising energy prices are having a broad-based inflationary impact on the UK economy.
The latest official data from the Office for National Statistics yesterday revealed that factory gate inflation - the measure of how much manufacturers charge for their goods - hit double digits for the first time since comparable records began.
The ONS said that output prices rose 0.9% on the month in June, taking the annual rate up to 10% - the highest rate since 1986. That rise compares to a reading of 2.5% this time last year.
At the same time, manufacturers' own costs leapt by a record 30% on the year in June - suggesting that while many costs are being passed on to the consumer, companies' margins were being squeezed as never before.
Howard Archer, UK economist at Global Insight, described the latest producer price data as "pretty horrible".
He said: "Ongoing elevated inflationary pressures continue to constrain the Bank of England's ability to deliver any time soon the interest rate cuts that the economy so badly needs."
Nonetheless, as manufacturers pass on to consumers the burden of record oil prices, living standards are cut, which in turn threatens slower economic growth.
More than half of the June rise was attributed to soaring food and petrol costs - up 11.8% and 34.2% respectively over the year, and the UK now faces the prospect of its first recession since 1991.
Policymakers at the Bank of England are battling the dual problems of runaway inflation - usually combated with interest rate advances - and slowing economic growth, which has led to calls for interest rate cuts to inject new stimulus into the marketplace.
Nonetheless, the central bank's Monetary Policy Committee kept interest rates at 5% last week after inflation reached its fastest pace in more than a decade.
Consumer-price inflation surged to 3.3% in May, the highest since the Bank of England was given control over interest rates in 1997. Bank Governor Mervyn King has said the rate may yet exceed 4% later this year.
Fears of a marked slowdown in the economy and a possible housing market crash have led many analysts to argue the central bank will have to lower interest rates eventually - but those cuts will be difficult for MPC to justify with price pressures building so fast.
Policymakers argue that a weakening economy should help tame inflation, but also worry that too sharp a slowdown will actually drive inflation below its 2% target.
Vicky Redwood, UK economist at Capital Economics, yesterday said: "Another month, another awful set of UK producer prices figures."
She added: "Accordingly, these data underline why the MPC is unlikely to cut interest rates in the next couple of months, even though the economy is weakening fast."
Perhaps most worrying of all, however, was the further pick-up in core output inflation from 5.9% to 6.3%.
However, that rise was less than expected, and sterling fell to a session low against the dollar yesterday and UK interest rate futures also pared losses.
In late trading yesterday, £1 bought $1.9816.
