Chancellor to restate inflation target

PAUL WALLACE

and DIANE COYLE

The Chancellor will almost certainly use this week's Mansion House speech to restate the inflation target, and has already rejected the option of a sharp tightening of the range from 1-4 per cent to 0-3 per cent. But it is not yet clear whether he will go for a more modest tightening or a relaxation.

The move is being prepared as manufacturers across the country warn that they will soon be forced to pass on continuing increases in the cost of raw materials, posing the threat of higher inflation.

Figures due today are expected to show another rise in prices charged at the factory gate last month. There will be further inflationary increases this year if industry warnings are borne out.

If the Chancellor leaves the target range at 1-4 per cent, he will come under attack for relaxing it, since under the current regime established by Norman Lamont at the end of 1992 a lower range of 1-2.5 per cent was set for the end of this parliament.

One option might be to reduce the range to 1-3 per cent, the limits currently set by Sweden and Canada. This would enable Mr Clarke to cover his back if inflation does rise to 3 per cent by spring 1997, as the Bank of England fears.

Another option is to combine the 1-4 per cent range with an average target of 2 per cent, the goal currently set by Germany and France for consumer price inflation.

Kenneth Clarke has also rejected changing the target measure from RPIX, the annual rate of increase in the retail price index less mortgage interest payments, to RPIY, the Bank of England's preferred measure, which also excludes indirect taxes.

Indications of increasing cost pressures have come from a number of key industries. "Since late last year, there has been a dawning realisation among purchasing managers that they will have to accept price increases," Roger Trotman, managing director of the West Midlands reinforced plastics firm Tufnol, said. He said costs of the chemicals, paper and glass Tufnol uses were still climbing after jumping 40-100 per cent in 1994.

Fastest cost increases have occurred in chemicals, plastics, rubber, paper, metals and, lately, some foods. A weaker pound has made matters even worse in the case of imported materials.

Companies' abilities to push through price rises is not a foregone conclusion, of course. A recent report from the debt specialists Trade Indemnity revealed that an important reason for the jump in business failures in the first quarter of this year was that many firms had been squeezed out of existence by the pincers of rising costs and unchanged output prices.

However, only one of the 10 medium-sized British manufacturers contacted at random by the Independent at the end of last week thought it had become no easier to pass on higher costs to customers.

Jeremy Woolridge, chairman of the Midlands galvaniser BE Wedge Group, said: "Export margins are improving but domestic margins are not." It was as hard as ever to make customers operating in weak sectors of the British economy pay more for the products, he said. The price of zinc, the group's principal raw material, had risen 25 per cent in 1993-94, but had fallen a little this year.

According to the Confederation of British Industry's monthly survey of industrial trends, manufacturers' price expectations fell back from high levels last month. But the survey results are subject to seasonal bias, and other indicators have been less encouraging. The seasonally adjusted purchasing managers survey of 290 companies reported a small dip in its prices paid index in May - but the index was still at its second highest recorded level.