Costs up as manufacturers battle on

Sep 12 2009 by Iain Laing, The Journal

MANUFACTURERS saw the biggest rise in input costs in more than a year during August thanks to rising oil prices, according to a new report.

A 9.4% rise in crude prices pushed up input costs by 2.2% – the biggest monthly rise since June 2008, the Office for National Statistics said.

Prices at the factory gate rose by just 0.2%, putting a fresh squeeze on the margins of manufacturers already hit by recession. Over the year to August, output prices were 0.4% lower, compared with 1.3% in the 12 months to July.

But the impact of oil prices falling steeply from their record high of US$147 a barrel during the second half of 2008 – compared with flat or slightly rising crude prices this year – is likely to push factory-gate inflation higher.

Howard Archer, economist at IHS Global Insight, said the figures were “modestly above“ expectations but unlikely to worry Bank of England inflation-watchers as firms battle for work.

“While manufacturing activity is expanding again, substantially increased spare capacity and still-difficult conditions are maintaining pressure on firms to price competitively,” he said.

Alongside oil prices, scrap metal costs also put pressure on manufacturers with a 4.1% rise in August, the biggest monthly rise since March 2007. Core output prices rose 0.7% in August, the biggest monthly rise since May.

But Capital Economics’ Jonathan Loynes added: “Despite signs of producers’ costs starting to pick up a bit again, we still think that deflation is a bigger threat to the UK economy than a marked pick-up in inflation.”