Signs inflationary pressures are easing for manufacturers

The pressure on manufacturers to raise prices is easing, raising hopes that the current cycle of interest rate rises have come to an end.

But economists remain cautious, warning that fresh rises in energy prices and rising food prices are still causing central banks concern.

According for the Office for National Statistics (ONS), input prices charged to British businesses fell 0.5 per cent in August, below analysts' forecasts of a 0.2 per cent fall. It left the annual rate of input price inflation at 0.7 per cent.

Output prices – charged at UK factory gates – rose at the slowest rate since November last year in August, with only three sectors pushing prices up.

The output price index for home sales and manufactured products rose 0.1 per cent on the month – in line with expectations – and 2.5 per cent on the year, compared with increases of 0.3 per cent on the month and 2.5 per cent on the year in July.

The small rise in prices was due to increases in the cost of food, transport equipment and other manufactured products.

Core output price inflation – which strips out volatile food, fuel, tobacco and alcohol prices – also came in at the forecast increase of 0.2 per cent for the month of August, giving a year-on-year rise of 2.4 per cent.

The Bank of England held borrowing costs at 5.75 per cent last week, although it hinted last month that borrowing costs would have to increase again to bring consumer inflation back to its 2 per cent target.

However, the recent crisis in the global banking market has eased fears of fresh interest rate rises, even though economists are still concerned over rising oil and particularly food prices.

Currently City odds makers believe there is a 50-50 chance of an interest rate cut between now and December. The City bookie Cantor Index rates the chance of a rate cut at evens, with the chance of a rise given short shrift at 10-1.

But others are more cautious, fearing that food price rises are inevitable, with a lower harvest thanks to the wet summer, drought in Australia and other problems around the world creating inflationary pressures.

Andrew Milligan, head of global strategy at Standard Life, said yesterday's figures were good news, but cautioned that there remain considerable inflationary pressures elsewhere that could stay the Bank of England's hand and stave off hopes of an interest rate cut.

He said: "These figures are helpful, but not unexpected, given the fall-back in oil prices and the strength of sterling, but central bankers are more forward-looking at the moment.

"Oil prices are going up again and you also have significant food price inflation, if you look at the wheat price futures for example. There certainly is evidence in some parts of the world that supermarkets feel able to, or feel they have to, pass these on."