Rise in factory-gate inflation points to hold in interest rates

Factory-gate inflation hit a four-month high last month as the resurgent cost of oil forced manufacturers to bump up prices to customers, fuelling expectations the Bank of England will hold off from cutting interest rates for now.

While businesses are still struggling to pass on rising energy costs in full, they had more luck in raising prices at the start of the year than in the previous three months when factory gate prices declined. Between December and January, manufacturers' output prices rose 0.4 per cent, taking the annual growth rate to 2.9 per cent - the highest since September, according to official figures.

Raw materials costs climbed 1.9 per cent on the month and 16.2 per cent in the year to January as the price of crude oil reached its highest level since records began in 1991, and other commodities also hit new highs. Electricity prices jumped 51 per cent in the year to January, the biggest rise on record.

A CBI survey said small firms are being hit particularly hard by rising energy costs and will have to lay off workers in coming months.

Spiralling input costs triggered concerns that output prices are set to rise further and will work their way through to the consumer. The Bank of England is keeping a close eye on inflationary pressures and is likely to be concerned that pressures from rising fuel prices have not eased.

Alan Clarke, at BNP Paribas, said: "We are starting to see signs of output prices [albeit to a limited extent] catching up with input prices. In turn this implies firms are clawing back pricing power, as the burden from input costs rises ever higher. The Monetary Policy Committee will remain on alert for second-round effects, though this is likely to centre on earnings growth."

Higher energy costs are expected to push consumer price inflation above the Bank of England's 2 per cent target in the short term. Consumer price figures for January are expected to show a small rise to 2.1 per cent today, while tomorrow's labour market data will shed some light on wage growth.

There was also further evidence yesterday that the housing market has picked up. The Office of the Deputy Prime Minister said the average price of a home in December rose to £185,788. The 2.9 per cent annual increase, up from 2.2 per cent in November and 1.6 per cent in October, signals an acceleration in house price inflation, though the recovery remains muted.

Meanwhile, retailers in central London enjoyed a good January, with like-for-like sales 6.5 per cent higher, according to the British Retail Consortium. Sales have now risen for three straight months.