February 5, 2008 | posted by Michael Baxter in UK economy |

The latest report from the Chartered Institute of Purchasing and Supply (CIPS) is the stuff central bankers’ nightmares are made of.

It seems whichever way a central banker views the report, he or she is sure to come out in a cold sweat.

The Purchasing Managers Index, published by CIPS, fell to 50.1 in January, that’s the lowest level since August 2005. The good news, anything above 50 signifies expansion, so CIPS are not saying we are in a manufacturing recession yet, just very close. But, the New Orders Index, which provides an indication of how the sector is moving, fell to 49.7.

CIPS said, “The rate of contraction was only slight but companies reported lacklustre demand, particularly in key foreign markets.“ So that’s a worry, consumers are off the boil, we all know that, and with the pound falling, we need exporters to take up the slack, and start exporting. Yet the CIPS New Export Orders Index fell to 47.6, reflecting, as CIPS put it, “the effect of the softer economic conditions in a number of key markets, most noticeably in the US.”

Now, in the UK, the manufacturing sector has this tendency to play with recession, like a child with his favourite toy.

But, right now, we need our manufacturers more than ever, and we need them to get exporting.

Okay, so none of that is good. But why should central bankers, whose remit is merely to worry about inflation, be fretting?

Well, the answer to that lies with the prices our manufacturers are being charged, and the prices they are then charging their customers.

The CIPS prices paid index shot up to 69.3, the highest level since July 2006.

But, more to the point, the prices charged index leapt to 57.9, the highest level ever recorded.

So that’s an industry heading for recession, while prices are soaring. There is a word to describe that, and that word is stagflation.

Have you seen that film Cloverfield yet? In a cynical, age, when we think we have seen just about all the frights Hollywood can conjure, it is a truly scary monster flick, perhaps having a similar impact on audiences to that the original King Kong had when it was released.

But, for Mervyn King and chums, the latest CIPS data, must be even-more frightening.