Inflation risk dents 15-year factory high

Julian Harris
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OVERSEAS demand for British factory goods shot up this month at its highest rate since July 1995, the Confederation of British Industry (CBI) said yesterday.

However, the CBI’s monthly trends enquiry also became the latest business survey to expose spiralling price pressures in the UK.

The balance of manufacturers expecting price hikes for their domestic customers reached its “third highest monthly reading of the last 20 years,” according to Michael Saunders of Citigroup.

“And this is the highest February reading for price expectations since 1989,” Saunders said.

The survey, which asks manufacturers how their prices will change in the coming three months, has been a strong guide to future inflation trends, Saunders argued.

“The message from this survey, and other lead guides, is that the UK faces an extended inflation overshoot,” he warned.

The expected upturn in factory prices is “due to manufacturers looking to protect their margins as their input costs rise strongly,” said Howard Archer of IHS Global Insight.

However, the survey provides reassurance that manufacturing, the UK’s “star performer,” remains “in good shape,” Archer added.

Factories’ total order books bounced back from a disappointing score last month. While eight per cent more respondents say order books are below normal than above normal, this is a significant improvement on January’s score of -16 per cent, and above the long term average of -18 per cent.

The recovery prompted optimism among manufacturers, with a balance of 23 per cent predicting an increase in output over the next three months – the strongest anticipated growth since June 2007.

“With expectations for output growth at their strongest since before the recession, the recovery in the manufacturing sector remains well on track,” said Ian McCafferty, chief economist at the CBI. “The sector should continue to make an important contribution to broader economic growth,” McCafferty said.

“Exports are benefiting from the low pound and strengthening global growth,” Saunders added.