March 11, 2008 | posted by Michael Baxter in UK economy, inflation |

You will recall, one of the big nasty snags with the economy at the moment is that while there are some disturbing signs out there of a slowdown – although this has not shown in the GDP figures yet, and a cut in the interest rate would be handy for kick-starting the economy,  inflation has reared its ugly head, making it difficult for the Bank of England to justify rate cuts.

The place where inflationary pressures are most obvious is with manufacturers, and yesterday saw the latest set of data for inflation in the world of production.   Last month saw records tumble as output prices in the year to January rose by 5.7 per cent – the highest rate in 16 years.   Now the figures for February are out – and there’s no change.  The annual rate of output prices – that’s what manufacturers charge their customers, remained at 5.7 per cent. 

There was some good news, output prices only rose by 0.3 per cent on last month. That is still far too high, but at least it’s down on January, when prices charged by manufacturers leapt by a full percentage point in just one month. 

As for input prices, these rose to an annual rate of  19.4 per cent.  Now we all know one of the reasons why this index is rising: the high price of oil and food.    But, even if you strip out food, beverages, tobacco and petroleum industries, even then the annual rate of manufacturers’ input price inflation was 8.2 per cent.  And for that matter, the output price index excluding food, beverages, tobacco and petroleum industries, still saw a 3 per cent annual jump.  

It will take a few months before we see the extra prices manufacturers charge reflected on the High Street – that’s why it seems likely the consumer price index will rise during the next few months. 

That is why the Bank of England also has a terrible job in striking the right balance with the rate of interest.  Are the current inflationary pressures one-offs?  Will they ease on their accord, in which case it would be a mistake to keep interest rates high when there is a danger the UK could follow the US down.  On the other hand, if the inflationary pressures are deeper than that, it could be a huge mistake to cut rates.