Record UK producer inflation dents rate cut hopes

British factory gate prices and producers' costs rose at a record pace last month, official statistics showed yersterday, clouding the outlook for an interest rate cut next month.

The Office for National Statistics said output prices rose an unadjusted 1.4 per cent on last month, taking the annual rate up to 7.5 per cent. Both rates were the highest since the series began in 1986.

Input prices rose an adjusted 2.4 per cent on the month, taking the annual rate up to 23.1 per cent - also the highest since records began - driven by soaring fuel and food costs.

The sterling rose and interest rate futures fell as the stronger than expected data encouraged investors to bet that interest rates may not fall as far as expected this year.

The BoE is widely expected to cut interest rates to 4.75 per cent next month, but signs that raw materials costs are still surging and manufacturers are passing on some of those increases to customers could raise an element of doubt.

"The producer price numbers are appalling and very concerning to policymakers," said David Page, an economist at Investec.

"The outlook for consumer price inflation is for a marked rise above three per cent, with the risk of it staying there for some time."

The consumer price index for April is due today and analysts expect CPI to rise further above the central bank's two per cent target to 2.6 per cent from 2.5 per cent in March.

Even though the BoE expects inflation to hit three per cent this year, it has been cutting rates amid concerns that the global credit crunch could drive Britain's economy into a sharp slowdown.

However, there is no consensus on how quickly and how far rates will fall given persistent worries about inflationary pressures as food and fuel prices rise around the world.

The ONS said home produced food input prices soared a record 32.3 per cent on a year ago in April and crude oil costs rose 62.6 per cent.

"The surge in all components of PPI in April undoubtedly is a threat to our view of a cut in rates at the June meeting," said George Buckley, an economist at Deutsche Bank.

"Importantly, while the Monetary Policy Committee would have known tomorrow's CPI reading, today's PPI report would not have been available to them when they met to set rates last week - this is new information for the BoE."

The BoE held rates steady at five per cent on Thursday after three cuts since December. The central bank also publishes its quarterly inflation forecasts on Wednesday.

Economists expect the BoE to raise its inflation profile and lower its growth outlook compared with February's report.

Separately, the ONS said Britain's goods trade deficit with the rest of the world narrowed slightly to £7.437 billion in March from £7.587 billion in February.

The goods trade gap with non-EU countries narrowed to £3.772 billion from £4.085 billion in February.