Factory gate price rise reaches 4.8%

PAUL WALLACE

Economics Editor

Fresh evidence of the strength of cost pressures in the UK economy reinforced Eddie George's case for a rise in interest rates. And the worst trade figures since December cast a shadow over the continued ability of exports to drive the recovery.

Core factory gate inflation rose in June more than the market had expected to an annual rate of 4.8 per cent, the highest for four years. While producer input price inflation fell, to 10.2 per cent, it came in considerably higher than had been anticipated. Market forecasts had been for rates of 4.6 and 8.8 per cent respectively.

In evidence to the Treasury Select Committee last week, the Governor of the Bank of England referred to the importance of cost pressures when he gave a broad hint that he had continued to press for rate rises in his meetings with the Chancellor in June and July. When Kenneth Clarke first turned down his request, the information he and the Governor had in front of them showed core producer output prices rising at 3.9 per cent.

The figures "have gone exactly the way Eddie George has been warning" said Ciaran Barr, UK economist at Morgan Grenfell. Faced with these "substantial cost pressures", retailers could be expected to pass on at least some of them, pushing up the measure of retail price inflation the Government is targeting.

The rise in factory gate inflation was likely to prompt the Governor to push harder for a rate rise at his next meeting with the Chancellor, warned Geoffrey Dicks, UK economist at NatWest Markets. If Thursday's retail price figures "show consumers becoming less resistant to price rises a rate increase before the budget will be back on the agenda".

Further back the chain, the general picture was for price rises in most sectors as the effect of sterling's decline this year continued to affect input prices. These were described by Kevin Darlington, UK economist at Hoare Govett, as "disappointingly strong, failing to deliver the hoped- for move to single-figure producer input price inflation". There was some sign, however, that relief might be in sight for the printing and paper industry with a decline in input prices of 0.2 per cent over the month, the first fall since the end of 1993.

Disappointing trade figures added to a downbeat day in which a CBI survey showed a drop in confidence in the financial services industry.The global trade deficit in April was pounds 1.4bn, the highest since December and up pounds 900m from March. The deficit with EU countries rose from pounds 300m to pounds 900m.

However, the Central Statistical Office pointed out that pounds 700m, three- quarters of the rise in the deficit, could be attributed to erratic items: lower exports of precious stones, higher imports of aircraft and the import of the cruise ship Oriana.

Underlying export volumes (excluding oil and erratics), rose by only 0.2 per cent in the three months to April, compared with the three months to January. The slowdown here has been dramatic: in the final quarter of last year export volumes were rising at more than 2.5 per cent. However, some City economists, such as Adam Cole of James Capel, point to the continuing growth in value terms of 3.7 per cent in the latest three months.