Share

UK inflation risk mounts on record surge in factory costs

London - UK factories saw costs rise at a record pace at the start of 2017, pointing to increasing upward pressure on inflation that could weigh on the economy this year.

A measure of input prices in IHS Markit’s monthly Purchasing Managers Index jumped to the highest since the series began in 1992, it said on Wednesday.

The headline activity index for manufacturing was at 55.9, comfortably above the key 50 level that divides expansion from contraction, and a measure of output rose to the highest in almost three years.

The surge in costs reflects the pound’s drop since the Brexit vote and an increase in the price of oil and raw materials such as plastics and steel.

As that filters through to other parts of the economy, it could put a squeeze on households and damp consumer spending, one of the main engines of growth in recent years.

Manufacturing lobby group EEF highlighted this risk, saying there’s “mounting evidence” of pricing pressures across industry.

“This does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth,” said EEF Chief Economist Lee Hopley.

The pound rose for a second day, advancing 0.4% to $1.2626 as of 12:56 London time. Ten-year gilts declined.

The pass-through from the exchange rate is also an issue for the Bank of England, which will publish new forecasts for growth and inflation on Thursday alongside its latest policy decision. While it’s focused on supporting the economy through potential volatility related to the UK decision to leave the European Union, its capacity could be constrained by the pickup in prices.

Inflation outlook

In November, the BOE forecast that inflation will reach 2.7% by the end of 2017. Consumers’ one-year expectations rose to 2.6% in January from 2.4% in December, Citigroup said on Wednesday.

Longer-term expectations remained at 3%, and Citigroup said the readings probably aren’t high enough to overly concern policy makers.

“With the former below Bank of England forecasts and the latter below the long-run average, the MPC is unlikely to be worried about unanchored expectations,” it said.

Markit also noted that while the weaker pound continues to squeeze manufacturers, the positive exchange-rate impact on exports appears to be "waning."

The report showed growth in new overseas business slowed sharply in January.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.3%
Rand - Pound
24.14
-0.1%
Rand - Euro
20.65
-0.3%
Rand - Aus dollar
12.38
+0.3%
Rand - Yen
0.13
+0.5%
Platinum
905.16
-2.0%
Palladium
1,006.63
+0.1%
Gold
2,157.24
-0.2%
Silver
24.94
-0.4%
Brent Crude
86.89
+1.8%
Top 40
66,252
0.0%
All Share
72,431
0.0%
Resource 10
53,317
0.0%
Industrial 25
100,473
0.0%
Financial 15
16,622
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders