Lower factory gate prices support Clarke's rate cut

Prices charged by manufacturers at the factory gate fell in May for the first time since August 1992, according to figures yesterday which lent support to Kenneth Clarke's surprise cut last week in the cost of borrowing.

There was further good cheer for the Chancellor in news that the recovery in retail spending strengthened last month, although this weighed against his interest rate decision. Sales growth at big stores was the second- highest since it started its monthly survey, the British Retail Consortium said.

Most analysts believe growing evidence of a consumer recovery led Eddie George, Governor of the Bank of England, to oppose last week's quarter point reduction in base rates.

Mr George said yesterday there was room for "minor disagreements" in the monetary framework.

Economists said the slowdown in producer price inflation would be echoed in lower retail price inflation in the next 12 months unless retailers took the opportunity to increase their profit margins.

Adam Cole, an economist at James Capel, said: "The producer price figures provide just the sort of justification for last week's base rate cut Mr Clarke will have been hoping for." Prices charged by manufacturers fell 0.1 per cent in May, taking their year-on-year increase down to 2.9 per cent from 3.2 per cent in April.

"Core" prices, excluding energy and food, grew at an annual rate of only 2.4 per cent, although they edged up in May.

Prices paid for materials and fuels fell 0.5 per cent, taking their annual rate of increase to 1 per cent, down from 2.4 per cent in April. An 8 per cent fall in crude oil prices accounted for the drop last month.

There was an even more dramatic slowdown in "core" input prices, down 1.7 per cent in the year to May after falling 1 per cent in the year to April. This measure of prices right at the beginning of the production chain has fallen for eight months running - the longest run of declines since the mid-1980s. The only remaining area where materials costs are rising is imported foods, up 3.9 per cent in May despite the pound's strength.

"This is unambiguous good news on inflation," said Simon Briscoe, UK economist at Nikko Europe.

The good news on consumer spending was the rise in annual sales growth at 75 big retailers monitored by the British Retail Consortium.

The value of like-for-like sales was 6.2 per cent higher in May than a year earlier, the highest recorded since the survey started at the beginning of 1994 apart from an Easter-boosted surge in March.

The increase - in the coldest May on record - represented a significant advance on the 4.1 per cent average growth of the previous three months. Housing-related items such as china, furniture and DIY products did particularly well.

So did clothing, with knitwear purchases offsetting disappointing sales of warm-weather clothes. Vitamins sold well at the expense of sun creams.

Andrew Higginson, chairman of the BRC's economics committee, said: "Last week's modest interest rate reduction was welcome and is a further step in the right direction."

Andrew Sentance, a London Business School economist who advises the BRC, said: "On current trends we are heading for the strongest period of consumer growth seen in the UK since the late 1980s." He added, though, that the present environment was very different from the boom conditions then.

The pound lost more than a pfennig against the mark, ending at DM2.3522 yesterday. It also closed down a cent at $1.5317. Most of the rash of economic figures due later this week are expected to tilt Mr Clarke's way.