Manufacturers up prices at fastest on record

LONDON (Reuters) - Manufacturers ramped up prices at the fastest rate on record in February as growth in the sector edged up from near stagnation and input costs soared at the strongest pace in three years, a survey showed on Monday.

Such a strong signal that companies are seeking to pass on surging raw materials and energy costs to customers is likely to worry Bank of England policymakers as they try to steer the economy away from a sharp slowdown.

The Chartered Institute of Purchasing and Supply/NTC purchasing managers' index picked up to 51.3 last month, just above forecasts for a reading of 51.0, from 50.7 in January.

A reading above 50.0 indicates expansion, while anything below points to contraction.

The output price index jumped to 59.9 from 57.9 in January, the strongest inflation in prices charged to customers since that series began in 1999.

Sterling rose after the data and analysts said the strong inflation indicators cemented expectations that the Bank will hold rates at 5.25 percent at its meeting this week.

The central bank may find it difficult to deliver many more interest rate cuts this year if price pressures continue to intensify, especially if the manufacturing sector avoids falling into a sustained period of contraction.

"This report fits with the flavour of other recent indicators -- that activity isn't particularly good and the risks are of worse news ahead," said Alan Clarke, an economist at BNP Paribas.

"However, with inflation leading indicators heading in the wrong direction this is going to make it very hard for the Monetary Policy Committee to step up the pace of interest rate easing in the very near term."

INFLATION IN PIPELINE

There looks like being no let-up in simmering inflationary pressure throughout the factory pipeline, with the input prices index rising to 72.2 last month from 69.7 in January -- the strongest cost inflation since November 2004.

"Almost half of the survey panel reported a rise in their purchasing costs, which they attributed to high prices for chemicals, energy, food products, metals, oil and plastics," CIPS/NTC said in a statement.

Manufacturers are also feeling the impact of the global credit crunch, with new export orders contracting for the second month in a row as demand cooled from Europe, the United States and Asia.

New orders overall have also suffered two successive months of decline for the first time since mid-2005.

"Much of the weakness in the UK manufacturing economy was centred on the investment goods sector," CIPS/NTC said.

"Capital goods producers scaled back output for the first time in fifteen months in February, following sharp falls in the level of new orders to the sector during recent months."

The pick up in activity on the month was largely due to companies working on existing orders, with backlogs of work falling sharply again.

CIPS director Roy Ayliffe told Reuters in an interview last month that he expected the manufacturing sector to suffer some months of contraction this year, but said doom and gloom stories about the economy were overdone.