UK factory input costs surging
Simon Ward
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Recent commodity price gains and sterling weakness are putting strong upward pressure on manufacturers' input costs.
The Journal of Commerce industrial commodity price index – covering 18 materials used in manufacturing production including crude oil and natural gas – rose to a new recovery high last week. In sterling terms, the index is now 6% above the peak reached in May 2008, when the pound was at $1.95 – see first chart.
The second chart shows annual rates of change of the official producer input price series and the sterling-based Journal of Commerce index. Sterling commodity prices are 55% higher than a year ago – the largest gain since 1974. Input price inflation – an annual 8% in January – may rise to 20% or more this spring.
With output and orders recovering, the low level of sterling reducing competition from foreign producers and the Bank of England signalling no intention to tighten policy despite high inflation, manufacturers are likely to pass these increases on rather than absorb them in margins.
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