Rate fear as cost of raw materials rises

SIGNS OF an end to falling prices in the manufacturing sector emerged yesterday in a report which showed the cost of raw materials rose last month for the first time in four years.

Input prices rose in August for the first time since September 1995 despite a slowdown in growth in the sector. The absence of price pressures among manufacturers has been crucial in driving down inflation and tentative signs of price pressures sparked renewed fears over interest rates.

The Chartered Institute of Purchasing and Supply (CIPS) said input prices rose to 53.2 from 47.2 on an index where any number over 50 indicates a rise. Activity fell to 52.9 from 53.1 but represented the third consecutive month of growth. Output increased at its fastest rate for two years.

The institute said that as rising demand absorbed spare capacity, competitive pressures on suppliers eased, allowing them to raise prices. It added that a modest depreciation in sterling has driven up import prices although this failed to boost export orders. The survey disappointed analysts' hopes that firms would continue to contain price pressures. "The data is unhelpful for interest rate sentiment," said HSBC's Adam Cole.

The report came as European managers said input prices rose at their fastest rate for two years. On Tuesday an unexpectedly sharp rise in United States input prices knocked almost 1 per cent off Wall Street. John Shepperd, at Dresdner Kleinwort Benson, said: "Input prices are going to accelerate. The UK is far from unique; it is a global phenomenon and depends largely on oil prices."

CIPS said suppliers' delivery times lengthened for the first time in 14 months. This tends to happen when demand outstrips supply and reflects the start of demand-led inflation.

CIPS said companies cut back stocks of both raw materials and finished goods. Roy Ayliffe, CIPS director of professional practice, said: "Healthy demand has again buoyed the manufacturing sector with further output growth acceleration. In their drive to improve business performance, purchasing managers have continued to eliminate excess stocks."

Last week official figures showed stocks fell pounds 1.8bn in the second quarter of the year, the largest drop since 1991, indicating managers were surprised by the speed of economic recovery.

Yesterday's report, coming just a day after house prices and consumer lending figures hit six-year highs, will add to fears of a hike in interest rates - possibly as soon as next week. Financial markets are pricing in a 0.25 per cent rise in September.

Analysts said the survey was not enough in itself to trigger a rise but Jeremy Hawkins, of Bank of America, said: "Coming on top of the Nationwide house price index, the Bank will be getting increasingly twitchy."

Further evidence of a housing recovery came from Halifax, which said annual inflation hit 9.4 per cent last month, the steepest rise since 1989 and double the 4.4 per cent at the start of 1999.