British factory gate inflation rose in December to its highest annual rate since August, driven by a sharp rise in the price of crude oil and food that will add to the Bank of England's worries about inflationary pressures. Financial markets have increasingly brought forward their predictions for a BoE interest rate rise to as early as May, due to growing inflation expectations on bond markets and among the general public.
Friday's official data showed a bigger than expected increase in the pipeline pressures on consumer price inflation, which is already more than a percentage point above its 2 percent target and is forecast to rise towards 4 percent. The Office for National Statistics said producer output prices rose 4.2 percent in December, above forecasts for an annual rise of 3.9 percent. On the month, output prices were up 0.5 percent, versus a 0.4 percent forecast.
"This makes very uncomfortable reading for the Bank of England and it will cast further doubts about how far and how fast retail and consumer price inflation will retreat in the second half of this year," said RBS economist Ross Walker. The central bank has forecast that consumer price inflation will peak early in 2011 and fall back to its target early in 2012 as the one-off effect of higher commodity prices an d a rise in value-added tax drops out of the annual data.
December input prices were 12.5 percent higher on the year, well above forecasts for a 10.4 percent rise and the biggest annual increase since April. November's reading was 9.2 percent. Economists had expected some acceleration in input costs due to higher oil and gas prices and the weaker pound, and say there is little the BoE can do about its effect on consumer prices in the short term.
"This is primarily an oil and commodity price effect," said Commerzbank economist Peter Dixon. "It is going to raise pressure on the Bank of England ... but the question is what would a rate hike do to curb this problem? Probably not very much because it is a commodity price effect." A slowdown in the growth of labour costs had been expected to keep output prices more steady. Even after stripping out food and petroleum input costs, the annual rate of input price inflation in December rose to 8.8 percent from 7.5 percent on a seasonally-adjusted basis.
A jump in the cost of crude oil over the year contributed almost half of the annual increase in input cost inflation. Rises in the cost of home-produced food and imported metals also playing a significant role. The cost of crude oil inputs is 26.2 percent higher than a year ago, its highest annual rise since May 2010. This is having a knock-on impact on fuel costs, which are rising at their fastest annual pace since May 2009. The cost of home-produced food materials is 11.3 percent higher on the year - its biggest annual rise since 2008.