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Factory gate prices show first fall for 18 months

Drop in factory prices may suggest inflation is also declining, clearing path for Bank of England to pump more money into UK economy

Prices charged by Britain’s factories fell for the first time in 18 months in December, suggesting that inflation is coming down and leaving the door open for the Bank of England to pump more cash into the flailing economy.

The Office for National Statistics said output prices charged by producers and their input costs both rose at the slowest pace since 2010 as crude oil and imported chemicals dropped in price in December.

Policymakers at the Bank of England have predicted inflation will come down sharply this year – it is currently more than double the government-set target – and the latest news on producer prices will bolster their view.

The Bank chose to stay its hand on printing more money at the end of its latest policy meeting on Thursday but it is widely expected to expand its programme of quantitative easing (QE) as soon as next month in the face of stalling growth.

“Today’s figures confirm that disinflationary pressure in the economy is building,” said Samuel Tombs, UK economist at Capital Economics.

“They should help to convince the monetary policy committee that inflation will fall to well below its target in 2013 and therefore increase the chances that the committee will sanction more QE at next month’s meeting.”

The ONS said output prices fell 0.2% in December from November, the first monthly drop since June 2010. That left prices up 4.8% on the year, the slowest pace of inflation for a year.

But there were further signs that manufacturers were facing a squeeze on their margins, as rises in their raw material costs outpaced the price rises they feel able to demand from their customers. Input prices rose 8.7% on the year, almost twice the pace of output prices. Still, that was the slowest rise since October 2010.

Business surveys suggest input prices could fall further in coming months. Chris Williamson, chief economist at data specialist Markit, which publishes monthly surveys of manufacturers, noted that those reports show input prices falling at the steepest rate since June 2009.

“Companies reported that weakened demand for raw materials, both UK and globally, has meant suppliers have been keen to offer discounts to generate sales. This is something that is clearly being replicated on the high street, as consumers tighten their belts, and is good news for inflation,” he said.

“However, oil could once again represent a fly in the ointment, as tensions in the Gulf drive up oil prices for industry and households alike.”

Separate data from the ONS showed output from the UK construction sector, which makes up 7.6% of the economy, rose 0.2% in non-seasonally adjusted terms in November, leaving it down 1.6% on the year.

Howard Archer, economist at IHS Global Insight, said the data raised fears the construction sector contracted in the fourth quarter of 2011 and contributed to an overall decline in GDP.

“The soft November construction output data follow on from very weak industrial production data for November which suggest that the industrial sector – which accounts for 15.4% of GDP –is likely to have contracted by around 1.2% quarter-on-quarter in the fourth quarter of 2011,” he added.

“Our current view is that GDP was essentially flat in the fourth quarter, but we are becoming increasingly concerned that the economy contracted modestly.”

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