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UK industrial price pressures sticky

Posted on Friday, February 10, 2012 at 03:09PM by Registered CommenterSimon Ward | CommentsPost a Comment

UK producer output prices rose by a stronger-than-expected 0.5% in January, consistent with manufacturing inflationary pressures remaining sticky.

The annual increase slowed but was still a chunky 4.1% last month. Optimists, however, will point to a fall in “core” annual inflation (i.e. excluding food, beverages, tobacco and petroleum) from 3.0% in December to 2.4% – the lowest since February 2010.

The recent reduction was signalled by a decline in the price expectations balance of the CBI industrial survey during 2011 but this remains above its long-run average and recovered over year-end – see chart. The suggestion is that core inflation will stabilise around the current level or even revive.

The view here has been that the Bank of England and the consensus are, once again, overestimating disinflationary forces and that the 12-month CPI increase, rather than falling below target by late 2012, may bottom at about 2.5% in the autumn and move higher in 2013. Such a scenario, of course, would imply that yesterday’s MPC decision to expand QE by a further £50 billion was a mistake.

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