UK manufacturing stalls, prices soar

Britain's manufacturing sector failed to grow last month for the first time in almost three years but there was no let-up in inflationary pressures as firms raised prices at the fastest rate on record.

The Chartered Institute of Purchasing and Supply/NTC purchasing managers' index fell to 50 in May from 50.8. That was below the consensus forecast of 50.5 and was the weakest since July 2005.

The 50-mark separates expansion from contraction.

Sterling extended losses after the data, which coincided with Bank of England figures showing approvals for new home loans in Britain fell to a record low in April, raising fears the housing market is set for a protracted and painful slowdown.

"Slowing activity and accelerating prices have been a common theme in the economic data flow, and this morning's numbers are no different," said George Buckley, chief UK economist at Deutsche Bank.

Evidence that companies are continuing to pass on surging raw materials costs to customers may concern Bank of England policymakers as they try to cushion the economy from the effects of the credit squeeze.

The output price index rose to 62 from 61.9 in the previous month. Output prices have now increased in each of the past 34 months, by far the most sustained period of output price inflation in the history of the series.

The input price index eased slightly from record highs scaled in the previous month but remained at an uncomfortable level at 75.9.

"A mix of weaker demand and intense cost inflationary pressure ended a sustained period of expansion in the sector during May," said NTC Economist Rob Dobson.

"It is becoming increasingly likely that charge inflation will add further pressure to consumer price inflation in the coming months, making the Monetary Policy Committee's tightrope walk between rising cost pressures and slower economic growth even more precarious," said Mr Dobson.

Manufacturing new orders declined for a fifth month. Weak domestic demand conditions were the main drag on total order books as the level of new export orders posted a slight gain on the month.