British manufacturers' core output prices rose at their sharpest monthly rate in nine years last month, in a sign that the soaring cost of commodities is pushing up inflationary pressures.
The Office for National Statistics said yesterday that producer output prices excluding food, drink, tobacco and petroleum products rose by 0.5 per cent in August in their biggest jump since July 1995 and five times the rate analysts predicted.
This took the annual rate of core factory gate inflation to 2.1 per cent, its highest since June 1996.
The ONS blamed the rising cost of steel scrap because of buoyant global demand. Steel shortages in the United States have pushed prices up sharply in recent weeks.
Gilts extended losses while the pound climbed as dealers reckoned the figures had increased the chances of the Bank of England, raising interest rates again in the coming months.
"The data is a bit disturbing. The key question is whether this will filter through to the High Street and the Monetary Policy Committee will be vigilant about inflation," said Philip Shaw, chief economist at Investec. The BoE left interest rates unchanged at 4.75 per cent last week but most analysts still expect another increase in November. Separate official data published yesterday showed the annual rate of house price inflation accelerated to 14.3 per cent in July from 13.9 per cent in June.
The ONS said overall producer output prices were also up, rising by 0.2 per cent on the month for an annual rate of 2.6 per cent, the same as in the previous two months which was the highest in eight years.
The rest of the report suggested continued upward pressure on factory gate prices in the months ahead if manufacturers even try to maintain profit margins.
The cost of raw materials shot up by 1.6 per cent on the month, leaving it 4.8 per cent up on the year.
The chief reason was a surge in crude oil prices which increased by 17.8 per cent in the steepest hike since May 2000.
Even allowing for crude oil, core input prices rose by 0.7 per cent on the month and by 1.9 per cent on the year, the sharpest annual rate since April 2001, as rising global demand has pushed up other commodity prices.
British finance minister Gordon Brown said on Friday that surging commodity prices had dented the optimism on the world economy that policymakers had felt earlier in the year.
Prices of imported materials as a whole were up three on the year in August - the sharpest rate of increase in more than three years - probably aided by the fall in sterling over the month.
Recent survey evidence has also suggested that selling prices for the manufacturing sector are picking up.
"Outside of the rise in oil prices, the upward trend in underlying producer price inflation appears to be led by manufacturers themselves, keen to expand their price-cost margins," said John Butler, UK economist at HSBC.
"There is now some evidence that inflationary pressure is starting to build in early parts of the supply chain, apparently led by both cost and demand pressure."
Consumer prices data for August will be published today.