UK manufacturing price-raising plans inconsistent with inflation target
Simon Ward
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The January CBI quarterly industrial trends survey provides further evidence that the MPC is losing control of inflationary expectations. A net 33% of firms reported plans to raise prices (after seasonal adjustment) – the highest, except for one month in 2008, since 1984.
The price-raising balance correlates with CPI goods inflation, suggesting that this will rise from an annual 3.5% in December to about 5% in early 2011, sufficient to add 0.8 percentage points to the headline CPI rate, given the 55% weight of goods in the basket – see chart.
The CBI balance relates to pre-tax factory-gate prices so the latest surge cannot be attributed to the January VAT hike. Rather, it reflects pass-through of recent and expected cost increases, with firms apparently confident that the MPC will tolerate the implied inflation overshoot.
Other notable features of the survey were a further strengthening of investment plans and a rise in capacity shortages, both consistent with the "output gap" in manufacturing being close to zero or even positive.
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