View from City Road: Optimists still hold sway on inflation

Although the US bond market has begun to worry about inflation and higher interest rates, the inflation optimists still have the upper hand in Britain. Yesterday's figures for producer price inflation are a case in point. The rise in the price of goods leaving the factory gate is much as the markets expected, but input costs are surprisingly good.

The price of materials and fuels purchased by manufacturing industry has dropped for seven months in succession, giving a cumulative decline of 5.4 per cent. This is not, please note, a fall in inflation. It is a good old-fashioned fall in prices. Once the Central Statistical Office has applied its seasonal adjustment, we still have three successive monthly declines - two of them of more than 1 per cent.

There have been falls in costs throughout manufacturing, but the drop is concentrated on the food, beverage, and tobacco manufacturing industries, where input prices are down 7.3 per cent since March. The fall in the rest of manufacturing is just 2.8 per cent, largely explained by the weakness of oil prices and the rise in sterling.

Food retailers may be squeezing their suppliers; that is certainly one way J Sainsbury intends to fund its price cuts. There may also be some price discounting in wines and spirits. Whatever the implications for the companies' profits, it is certainly another blow to inflationary psychology. And there is probably more to come.