Business Analysis: Rise in input costs squeezes industry margins

The surge in commodity prices made its way to the factory floor last month as raw material costs rose at their fastest pace for almost a decade. Manufacturers responded by raising their prices, but not by enough to protect their thin profit margins, official figures showed yesterday.

The surge in commodity prices made its way to the factory floor last month as raw material costs rose at their fastest pace for almost a decade. Manufacturers responded by raising their prices, but not by enough to protect their thin profit margins, official figures showed yesterday.

The Office for National Statistics said input prices rose 0.1 per cent, below the 0.5 per cent predicted by analysts but taking the annual rate to 10.8 per cent, its highest since April 1995. The monthly rise in raw material costs was driven mostly by an increase in crude oil prices, which rose 2.7 per cent in the month and by 43.9 per cent in the year. Prices charged by producers for goods, excluding excise duties, rose by 0.4 per cent to an annual rate of 2.8 per cent.

Analysts said the figures highlighted the question facing the Bank of England over whether the increase in input costs would be felt in lower profit margins or higher prices.

Simon Rubinsohn, chief UK economist at the fund manager Gerrard, said the rise in prices would add to concerns at the Bank that inflationary pressures were building up: "It highlights the increasing inflation risk that is evident both in the central scenario of the [Bank's] inflation report and in the recent speeches of various monetary policy committee members." He said the Bank would probably raise interest rates in May, but that would not be the current cycle's peak.

Jonathan Loynes, chief UK economist at Capital Economics, said that while producers might be raising prices, there was little sign that retailers had passed on any of the impact to consumers. "Provided this continues, the main consequence of the rise in cost pressures looks likely to be a squeeze on companies' margins rather than a significant pick-up in high street inflation."