U.K. Producer Prices Rise by Most Since at Least 1986

By Brian Swint

Aug. 11 (Bloomberg) -- U.K. producer prices increased in July at the fastest pace since records began in 1986, adding to pressure on the Bank of England to wait before cutting interest rates as the economy edges toward a recession.

Prices charged by factories rose 10.2 percent from a year earlier, compared with a 10 percent increase in June, the Office for National Statistics said in London today. Economists forecast 10.3 percent, according to the median of 32 estimates in a Bloomberg News survey. Prices increased 0.4 percent on the month.

Bank of England Governor Mervyn King predicts record oil and food prices will drive inflation to double the 2 percent target later this year while the economy may contract. Policy makers, concerned that workers may ask for more pay to compensate for the higher cost of living, kept the main interest rate unchanged at 5 percent last week.

``Manufacturers are getting some traction to put up prices,'' said James Knightley, an economist at ING Financial Markets in London. ``This suggests that inflation will stay above target for longer. It'll take time for the Bank of England to respond to the recessionary environment with rate cuts.''

The pound was little changed against the dollar following the report, after falling against the U.S. currency for a seventh day. It traded at $1.9232 at 10:39 a.m. in London. It was also little changed against the euro at 78.22 pence per euro.

Inflation Rate

Inflation at factory gates has been slower than raw material cost gains for a year. Companies also aren't passing on those costs to households at the same rate. Consumer-price inflation probably accelerated to 4.2 percent in July, according to the median of 38 economists' estimates in a Bloomberg News survey. The statistics office will publish that report tomorrow.

The pound has fallen 12 percent against a basket of Britain's main trading partners in the past year, fanning the cost of imported raw materials. RPC Group Plc, the U.K. maker of plastic containers for Nivea sun cream, said July 23 that first-half operating profit will fall after polymer prices increased.

The weaker currency also makes British goods cheaper overseas. Exports rose 4.2 percent in June, outpacing the 4.1 percent gain in imports, the statistics office said today. The goods-trade gap still widened to 7.7 billion pounds ($15 billion), as the deficit with countries outside the European Union swelled to a record.

Raw Materials

Raw material costs jumped 30.1 percent from a year earlier, compared with 30.8 percent in June. Imported materials, including oil, rose a record 21.2 percent in the year, the statistics office said today. Input prices fell 0.6 percent from June, on a seasonally adjusted basis.

Oil prices have dropped 19 percent since reaching a record above $147 a barrel on July 11. They are still more than 60 percent higher than a year ago.

``It's early days to say that it's all clear, but the oil drop will have helped to assuage some of the central bank's fears,'' said Nick Bate, an economist at Merrill Lynch & Co. in London. ``The slowing in the economy should reduce the ability of producers to raise prices.''

The International Monetary Fund last week slashed its forecasts for U.K. economic growth to 1.4 percent this year and 1.1 percent in 2009. The economy expanded 3 percent in 2007.

The Bank of England releases new quarterly forecasts on Aug. 13. The next interest rate decision is Sept. 4.

The statistics office said that the producer-price index will be re-based from September to show 2005 as 100, compared with the current index that uses prices in 2000 as 100.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.