Producer input price inflation jumps

LONDON (Reuters) - Firms' raw materials costs posted their first annual rise in 8 months in October, propelled by rising oil prices and the weak pound which made imported goods dearer, official data showed on Friday.

The Office for National Statistics said producer input prices rose 0.1 percent on the year last month, climbing from a 6.2 percent annual fall in September and confounding analysts' expectations for a more modest pick-up to -1.3 percent.

And factory gate inflation also accelerated, albeit no more than expected, with output prices up 1.7 percent on the year in October, the highest rate since March and up from 0.4 percent in September.

"The eye-catching figure is the big jump in input prices," said Philip Shaw, chief economist at Investec. "The report as a whole is a reminder that there is an issue with imported costs coming into the UK, particularly commodity-based price pressures."

Favourable statistical effects from an oil price spike in mid-2008 had helped cap input price inflation this year, but that is starting to wear off as prices pick-up again. This is being exacerbated by the pound's 25 percent drop over the past two years.

Central bankers are also concerned about the risk of inflation as a result of the massive stimulus they have injected into economies to kick-start growth.

The Bank of England decided to pump another 25 billion pounds into Britain's economy on Thursday, only half the amount it delivered 3 months ago, and said it expected consumer inflation to pick up sharply above its 2 percent target in the near term.

FRAGILE ENVIRONMENT

However, the central bank also cited downside risks to inflation from the large degree of slack in the economy and weak demand as the economy gets back on its feet.

"It would be wrong to worry about a sustained rise in cost pressures," said Jonathan Loynes, chief European economist at Capital Economics, noting that input price inflation was still nowhere near its peak of 34 percent hit last summer.

"The long lags involved mean that most of the falls in costs seen over the last year have yet to feed through into consumer price inflation," he said.

Analysts will be paying close attention to new quarterly growth and inflation forecasts from the BoE next Wednesday, and which informed the central bank's decision this week. The next CPI data will be published on November 17.

The ONS said last month's pick-up in input price inflation was driven by a 0.8 percent annual rise in crude oil prices, the biggest increase since October 2008.

The price of imported metals, chemicals and other materials all rose at their fastest pace in several months.

There are some signs that manufacturers may be starting to pass on their increased costs to customers to repair margins, with the output price component in October's CIPS/Markit PMI survey signalling a first rise in factory-gate prices this year.

By contrast, British sugar refiner and sweetener group Tate & Lyle Plc (TATE.L) said demand was soft, which would have an impact on its pricing round at the end of this year.

"There is a little pressure as volumes are softer and this will be reflected in the round being slightly more competitive on prices," the group's finance director Tim Lodge told Reuters.