Industry bottlenecks add to inflation fears

BY DIANE COYLE

Economics Correspondent

Faster growth of manufacturing output, capacity bottlenecks and higher prices paid for raw materials were signalled in the latest monthly survey by the Chartered Institute of Purchasing and Supply. The evidence of inflationary pressure, backing up other recent business surveys, is likely to renew fears that interest rates will have to rise again.

The overall purchasing managers' index rebounded last month to 57 per cent, reversing a dip in January. A big increase in new orders, particularly for export, contributed to the latest rise. The improvement was strongest for electrical and electronic goods and metal products, although consumer goods orders recovered after a very weak January.

Output also jumped in February - the 30th successive monthly increase. The rise was less pronounced in consumer industries. The buoyancy of demand meant firms speeded up their hiring. The CIPS employment index rose for the 17th month in a row.

The bad news lies in the price index, down to 72.6 per cent from its record 75 per cent level in January but still disturbingly high. The index measures prices paid by manufacturers for materials and goods, and it was the eighth month in which it registered above 70 per cent.

Raw materials prices rose again last month, particularly for steel, paper and plastics. The cost of a growing number of manufactured items bought by firms is on the increase, as higher commodity prices continue to work down the supply chain.

Peter Thomson, director-general of the CIPS, said the high price index figure was alarming, given the evidence that capacity in manufacturing was getting tighter.

The suppliers' delivery time index showed that delivery lead times had lengthened. Many items were reported to be in short supply, including metals, plastics, paper, electronic components and rubber.

Mr Thomson said: "You can't not have inflation when prices are rising due to capacity constraints as well as to companies' appetite to charge more."

The CIPS predicts that inflation will rise until mid-1996, with capacity constraints starting to bite.

David Walton, a senior economist at Goldman Sachs, said: "All the recent surveys of business have indicated pressures that mean the Government will have to raise interest rates at least one more time."

Michael Saunders at Salomon Brothers cautioned that the economy as a whole was not as buoyant as manufacturing, so the survey might overstate inflationary pressure.