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Factory gate prices surge

City A.M. Reporter
FACTORY gate inflation jumped more than expected to a 16-month high in March, raising doubts that consumer price pressures will subside as fast as the Bank of England expects.

The Office for National Statistics (ONS) said producer output prices rose 0.9 per cent on the month, more than twice the jump analysts had forecast, for an annual rise of five per cent – its highest since November 2008.

The pound rose to a seven-week high against the euro and interest rate futures fell as investors placed bets Britain's central bank would raise borrowing costs before the end of the year.

Jonathan Loynes at Capital Economics said: "March's surprisingly strong rise in UK producer prices will prompt some concern that pipeline inflation pressures are building."

The Bank of England targets consumer price inflation which is currently running a full percentage point above the bank's two per cent target.

Bank Governor Mervyn King is confident that the large amount of spare capacity in the economy will push inflation back below target later this year, although minutes to the central bank's March meeting noted a weakening currency did pose risks to this scenario.

The pound fell sharply in the first two months of this year, hurt by fears over the strength of the recovery and the government's ability to tackle a record budget deficit.

Sterling's trade-weighted index has rebounded since the start of the month but remains some 25 per cent below its mid-2007 peak.