LONDON (Reuters) - Sterling’s fall since Britain voted to leave the European Union stoked the sharpest rise in factory costs on record last month but offered little boost to exports, tainting otherwise robust manufacturing growth at the start of 2017.
The Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) edged down to 55.9 from December’s 2-1/2 year peak of 56.1, matching the consensus forecast in a Reuters poll.
The survey out on Wednesday suggested Britain’s economy continues to expand at a solid rate after outpacing its rivals last year, with the PMI’s gauge of factory output pointing to the fastest growth since May 2014.
But it also drove home the view shared by Bank of England policymakers, who meet this week, that rising prices will soon put a brake on household spending, a key driver of the economy.
Factories’ raw material costs rose at the fastest pace since PMI records began 25 years ago - fuelled by the pound’s near 20 percent drop against the dollar since June’s Brexit vote, as well as higher prices for steel and oil.
In response, manufacturers raised the prices they charged for their goods at the fastest pace since April 2011.
“With input prices rising steadily and firms increasingly looking to pass these on, this will likely eat into new orders during the course of the year and hence weigh on output,” Barclays economists Andrzej Szczepaniak and Fabrice Montagne wrote in a note to clients.
A separate Citi/YouGov survey of the British public on Wednesday showed inflation expectations for the year ahead rose to the highest since December 2013 in January.
In previous months spiralling manufacturing cost pressures had been matched with an improvement in export orders, but this faded in January’s PMI. Orders from abroad rose at the weakest rate since last May, before the Brexit vote.
However, this may prove to have been a soft patch.
Earlier on Wednesday the National Institute of Economic and Social Research raised its forecasts for growth and said exports would contribute as imports weaken.
The PMI showed manufacturers were optimistic about the outlook and relaxed about the sharp increase in costs, although it remained to be seen if this would hurt growth later.
“Domestic demand faltered the last time producers increased prices this quickly in 2011, and we doubt that this time will be different,” said Samuel Tombs, economist at Pantheon Macroeconomics.
Manufacturing accounts for around a tenth of British economic output, and recent strong manufacturing PMIs have not fully transferred into subsequent official growth statistics.
Editing by Hugh Lawson
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