Input costs rise at fastest rate since 1982

Manufacturers faced their steepest increase in the cost of materials since January 1982 in the year to September, but the increase in prices charged at the factory gate remained unchanged. Higher oil prices during the past 18 months have been inflicting a squeeze on profit margins, the official figures suggested, in a reversal of the earlier profits boost from falling commodity prices.

Manufacturers faced their steepest increase in the cost of materials since January 1982 in the year to September, but the increase in prices charged at the factory gate remained unchanged. Higher oil prices during the past 18 months have been inflicting a squeeze on profit margins, the official figures suggested, in a reversal of the earlier profits boost from falling commodity prices.

The figures posed no wider inflationary threat, most economists said. "Manufacturers are taking it on the chin. They are not passing on the inflationary pressure in their output prices," said Jonathan Loynes, chief UK economist at Capital Economics.

The price of materials and fuel purchased rose by 14.5 per cent in the year to September, and 3.7 per cent during the month. Oil costs were up 71.5 per cent in the year to September.

Excluding petroleum and other erratic components, costs rose 4.4 per cent year on year, the fastest rise since November 1995. The recent acceleration in this measure from close to zero at the start of this year indicates oil is no longer the only culprit for rising input price pressures.

Prices charged, however, were up just 2.5 per cent year on year, the same rate of increase as in August. The increase during the month was 0.3 per cent.

Excluding the effects of petroleum, food, drink and tobacco, "core" output price inflation rose 0.2 per cent during the month and 1.2 per cent in the year to September. This was unchanged from August although higher than the negative rates recorded earlier in the year. "The period of deflation in goods prices is fast coming to an end," said Richard Iley at ABN Amro.

Adam Cole, an economist at HSBC, said that in the past higher input prices were passed on to consumers after three to nine months, but this had lengthened considerably. "Recent experience suggests that maybe manufacturers' margins are taking the strain," he said.

A separate survey yesterday from the British Retail Consortium suggested the impact of the fuel protest on retail sales had favoured food stores, with declines in sales elsewhere. It indicated total sales growth picked up to 5.4 per cent in September from 4.3 per cent in August, but estimated the petrol shortages meant sales were £200m lower than they would otherwise have been in the affected week.

The impact of higher oil prices and the pound's decline against the dollar in raising costs has occurred at the same time as the strength of the pound against the euro has made it harder for manufacturers to raise their output prices. Analysts said export profit margins had suffered more than domestic margins from the cost squeeze. "The extent of the squeeze depends on where you are selling," said Mr Loynes. "Margins for manufacturers selling into domestic markets are still quite healthy."