Sharp rise in UK factory gate prices spurs pound

British factory gate inflation accelerated unexpectedly in March, data showed yesterday, boosting expectations interest rates will rise next month and lifting the sterling to a near 15-year high against the dollar.

The Office for National Statistics said output prices rose 0.6 per cent on the month in March, taking the annual rate to 2.7 per cent - the highest since August 2006 and well above forecasts for a steady reading of 2.2 per cent.

Policymakers have been concerned that companies are growing more confident in their pricing power after a spike in energy costs last year, especially given the implications higher factory gate prices have for future consumer prices.

March's figures - ahead of consumer price inflation data today - suggest firms are already managing to hike prices to repair their profit margins.

"It does demonstrate upstream pricing pressures bubbling away under the surface that pose a threat to the longer term CPI outlook," said Alan Clarke, an economist at BNP Paribas.

"Hence, if the bank does hike rates in May and the CPI plunges as we and most others expect this year, the bank is likely to remain on guard at least in the near term against these longer term risks." Strong house price inflation will also encourage those looking for the Bank of England to raise interest rates for a fourth time since August.

The government said annual house price inflation accelerated in February at its quickest annual rate since March 2005. Separately, property website Rightmove said asking prices are rising at their fastest annual pace in nearly four years.

"This is likely to keep retail price index inflation elevated and this will maintain the BoE's concern that inflation expectations could rise and pay pressures could intensify," said Karen Ward, an economist at HSBC.

The strong economic readings boosted the sterling beyond $1.99 to its highest level since the UK was ejected in September 1992 from Europe's Exchange Rate Mechanism, the precursor to the euro. Some analysts believe the pound is primed to breach the psychological $2 barrier this year, especially given forecasts for higher interest rates in Britain and the prospect of lower borrowing costs in the United States.

The producer price data showed core output price inflation also picked up more than expected to an annual 2.9 per cent, the fastest rate of growth since June 2006.

The ONS said increases in taxation on alcohol and tobacco from last month's budget would have added 0.05 percentage points to output prices if passed on in full.

An 8.2 per cent surge in crude oil prices in March drove input price inflation above expectations, up 1.2 per cent on the month and 0.7 per cent on the year. Higher metals costs also boosted both output and input prices.