Raw material prices highest since 1989

THE FALLING value of the pound pushed up industry's raw material costs by 6.9 per cent over the year to February, the highest rate since May 1989.

The evidence of potential inflation from the official figures nevertheless failed to worry the financial markets, where speculation resurfaced that the Chancellor would cut interest rates soon after next Tuesday's Budget.

Raw material costs shot up by 1.4 per cent during February, lifting the annual inflation rate by 0.6 percentage points after adjustment for seasonal influences. Before any adjustment prices rose 0.5 per cent, with the widespread increase in raw material prices partly offset by a seasonal fall in the cost of electricity to industrial consumers.

But the rising inflation rate for raw material prices has yet to be reflected in the price of manufactured goods. Factory gate prices rose by 0.4 per cent in February to stand 3.7 per cent above prices charged a year earlier. This compares with 3.6 per cent in January and the recent trough of 3.3 per cent reached last October and November. But, excluding volatile prices for food, drink and tobacco, factory gate prices increased by 0.3 per cent to stand 2.7 per cent above a year ago, unchanged on January's rate.

Although the pound has depreciated by almost 15 per cent since Black Wednesday last September, much of the decline may already have fed through to industry's raw material costs. Balance of payments figures show that import prices rose by 11 per cent between September and December last year. Imported goods account for roughly two-thirds of manufacturing industry's raw materials, with the balance made up of domestically produced materials and fuel.

The Treasury yesterday played down the sharp rise in industry's raw material costs, saying the increase was hardly surprising in view of the pound's decline. Unchanged unit labour costs provided a strong countervailing force to higher raw material costs and limited the inflation threat, a Treasury spokesman said.

The core rate of inflation for factory gate prices was low by historical standards, he said. The annual rate of 2.7 per cent compares with the latest trough of 2.4 per cent, reached in November.

The figures had little impact on financial markets, which were dominated by share prices briefly hitting a new peak before closing lower.

The FT-SE 100 index of leading UK shares rose 23.6 points to 2,980.9 after Wall Street's strong finish on Monday. But fears of a large rights issue and apprehension that the London market may be looking relatively expensive prompted a correction later in the day. By the close the index was down 7.4 points at 2,949.9.

With recent gains in share prices triggered by hopes of recovery, Barclays reported yesterday that 125,000 small businesses were launched in the final quarter of last year, an increase of 20 per cent over a year earlier. For 1992 as a whole start-ups were 455,000 - 30,000 below the number of new ventures in 1991.

Sterling fell back against the mark and the dollar following concern at the Government's Commons defeat on Monday night over an amendment to the Maastricht treaty. In London, sterling finished 1.16 pfennigs lower at DM2.3940 and fell 1.30 US cents to dollars 1.4335.

There was also speculation that Norman Lamont might decide on a further cut in interest rates soon after next week's Budget despite his denial that any additional reduction was being contemplated.

Elsewhere on the foreign exchanges the lira fell sharply as concern mounted over the political fate of Giuliano Amato, the Italian prime minister, in the spreading corruption scandal.

Despite intervention by the Bank of Italy, the Italian currency dropped to 962 to the mark from 951 on Monday.