British manufacturing grows faster

British manufacturing activity accelerated unexpectedly in May, driven by the strongest growth in production in eight months, with factory gate inflation picking up to equal a record high, a survey showed. The Chartered Institute of Purchasing and Supply/NTC purchasing managers' index rose to 54.9 last month from an upwardly revised 54.1 in April. Analysts polled by Reuters had expected a slight easing to 53.7.

A reading above 50.0 indicates expansion, while anything below marks a contraction.

Bank of England policymakers are likely to be concerned to see the CIPS/NTC index measuring output price growth nudging higher to equal February's series high of 56.9.

"This combination of rising inflationary pressures and strong growth continues. This may lead the Monetary Policy Committee to tighten monetary policy at a faster rate than previously anticipated," said NTC economist Rob Dobson.

Policymakers, currently battling to get inflation back to its 2.0 per cent target, have said they are on the look-out for any signs that manufacturers are ramping up prices to repair profit margins damaged in last year's energy price spike.

Inflation spiked above three per cent in March to hit its highest rate since comparable records began a decade ago. While price growth has eased since then, strong factory gate inflation may drive prices on the high street skywards again.

Financial markets are pricing in the possibility that the central bank may have to raise interest rates to as high as six per cent to combat price pressures, having already hiked rates four times since August to 5.5 per cent.

Manufacturers may be raising prices in response to the return of a pick-up in the cost of raw materials. The CIPS/NTC index measuring input price growth hit its highest since September, up to 64.8 in May from 63.3 in April.

Oil prices have traded above $70 a barrel again in recent weeks, having fallen from record highs near $80 reached last summer to around $50 in January. An acceleration in output helped the overall manufacturing activity index to push higher, as a tentative industrial recovery continues. The index measuring production rose to 57.5 from 57.3 in April, its strongest since September.