CBI sees inflation pressures building: City and Government at odds over strength and direction of recovery

THE Confederation of British Industry said yesterday that its latest survey of manufacturers showed a gradual build-up in inflationary pressure, while growth in factory output was likely to slow in the next four months after growing at its fastest rate for five years.

The Treasury said the survey showed recovery was becoming broader and stronger, although City economists noted that growth in business optimism was slowing and manufacturers did not expect to maintain the rapid expansion achieved early in the year. Manufacturers are expected to continue shedding jobs, but at a modest pace.

Sir David Lees, chairman of the CBI's economic affairs committee, said there was no case yet for a rise in interest rates, but that the next quarterly survey might suggest the moment was drawing near. 'If the Government and Bank of England do have to increase interest rates it may not necessarily be such a bad thing if the result is a prolonged period of stability.'

Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, meet for their monthly discussion of interest-rate policy tomorrow. City analysts do not expect them to move rates.

Inflation and interest rate worries dampened the mood in the stock market, where the FT-SE index of 100 leading London shares nonetheless closed 11.1 points higher at 3,117.2. The pound weakened, falling through the psychological barrier of 150 yen after a large sell order. Against a basket of currencies, sterling fell half a point to 78.6 per cent of its 1985 value, its lowest in 16 months.

A net balance of 12 per cent of manufacturers said they expected to raise prices in the next four months, with equal numbers saying they had raised and lowered prices in the past four months. Ian Shepherdson, of HSBC Greenwell, said the price figure was disappointing, reflecting tighter capacity and higher prices for raw materials. Unit costs are growing at their quickest rate for a year.

Sir David said it remained to be seen whether manufacturers could achieve the price increases they were looking for because of the strength of competition on the high street and the reluctance of consumers to pay higher prices.

The survey also showed a fall in the number of manufacturers working below capacity, from 59 per cent in April to 54 per cent in July. This is below the long- term average, although CBI economists argue that this is not necessarily a signal of inflation because companies can adjust capacity more flexibly than in previous economic cycles. One in five manufacturers said that shortage of plant capacity was likely to limit output over the next four months.

Manufacturers' order books grew more quickly over the past four months than at any time since late 1988, with export orders accelerating as as home orders were steady. Exports are expected to continue growing sharply, which the CBI took as a hopeful sign.

The CBI was less happy with figures for investment intentions. Manufacturers are still reluctant to spend more on capital equipment with a net balance of only 6 per cent expecting to raise spending on plant and machinery in coming months.

Half the manufacturers surveyed said uncertainty about demand stopped them from investing, compared with 47 per cent who said investment was not expected to be profitable enough.

A recent CBI study found many firms were cautious about investment because they did not believe the authorities would maintain a combination of steady growth and low inflation.

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