UK factory gate prices rose in April at the fastest monthly and annual rates since comparable records began in 1986 - official figures revealed yesterday - casting doubt on whether the Bank of England will feel able to cut interest rates in June.
UK factory gate prices rose in April at the fastest monthly and annual rates since comparable records began in 1986 - official figures revealed yesterday - casting doubt on whether the Bank of England will feel able to cut interest rates in June.
Producers' input costs also rose at the quickest annual pace since records started.
The data highlight the ever-worsening dilemma faced by the Bank of England's Monetary Policy, as growth slows sharply and inflationary pressures continue to build.
One economist described yesterday's producer prices data as "truly horrible" and another called them "nothing short of terrible".
The pound jumped as the City wondered whether its high hopes of a June rate cut might prove overdone, and it was last night up more than one-and-a-quarter cents on its close in London on Friday at $1.9612.
The outlook for UK interest rates should become much clearer with official consumer prices index inflation data today and publication of the Bank of England's latest quarterly growth and inflation forecasts tomorrow.
Yesterday's producer prices release looks like a substantial obstacle to a June rate cut. However, the MPC will need to balance the latest warning signs on inflation against evidence that UK economic growth is slowing very sharply. The MPC has noted a risk that annual CPI inflation, even though high now, could undershoot the MPC's 2% target in two years' time if the economy is allowed to weaken too much.
The Office for National Statistics said output or factory gate prices leapt by a record, unadjusted 1.4% during last month alone. This raised the annual rate of increase from 6.5% in March to a record 7.5% in April.
Input prices, comprising producers' material and fuel costs, jumped by a seasonally adjusted 2.4% in April and the annual rate of increase accelerated from 20.5% in March to a record 23.1% last month. The City had forecast an annual increase of 21.4%.
The cost of home-produced food materials used by producers was 32.3% higher last month than in April 2007 - the fastest annual rate of increase since records began in 1986.
After seeing the producer prices data, Howard Archer, chief UK economist at consultancy Global Insight, declared: "Ouch!"
He added: "The April producer price data are truly horrible and very worrying indeed for the Bank of England."
Archer noted that while energy and food were still playing a big part in the surge in producers' material and fuel costs - and rising factory gate prices - this was far from the whole story.
Core output prices - excluding food, drink, tobacco, and petroleum - rose by 1.0% in April, and their annual rate of increase accelerated from 3.5% in March to 4.5% last month.
On the same core basis, input prices rose by a seasonally adjusted 2.2% in April. This left them 12.6% higher than in the same month last year, an acceleration from an annual rate of increase of 9.9% in March.
Archer said the figures "will increase concerns that second-round inflationary effects could be increasing".
On the inputs side, the costs of imported food, metals, chemicals, parts and equipment, and other materials all showed further big rises in April.
Archer said: "Going forward, the Bank of England will be hoping that current growing signs that manufacturing activity is faltering will deter manufacturers from trying to raise their prices and limit their ability to do so. However, with oil prices reaching $126 a barrel, commodity prices elevated and the pound weaker, the upward pressure on manufacturers' costs continues to mount."
The MPC has cut UK base rates by a quarter-point three times this cycle, in December, February and April. It stood pat at 5% last week, and would have seen the producer price data before its nine members voted at noon on Thursday.
Archer said: "Sharply higher producer price inflation in April highlights why the Bank of England was unwilling to enact a back-to-back interest rate cut last week and raises serious questions as to whether the bank will be willing to cut interest rates from 5% to 4.75% as soon as June, despite current signs that the economic downturn may be deepening and widening.
"For now at least, we still expect the Bank to act in June, but it is by no means a gimme."
Paul Dales, at Capital Economics, said: "The latest news on the UK economy will make it even harder for the MPC to strike the right balance (between) supporting the weakening economy and keeping a lid on growing price pressures.
"In showing that producers are raising their selling prices at unprecedented rates, April's producer prices figures were nothing short of terrible."
Citing the rise in annual core output price inflation, Dales said: "This is particularly worrying as, up until now, the bulk of the pick-up in producers' selling prices had been confined to energy and food products. But now it appears that producers are raising the prices of other products too."
