U.K. August Producer Prices Rise for a Ninth Month

Sep 10, 2007 - British manufacturers increased their prices for a ninth month in August, feeding inflation pressures into the economy.

So-called output prices, unadjusted for seasonal swings, rose 0.1 percent after climbing 0.3 percent in July, the Office for National Statistics said today in London. Economists predicted a gain of 0.2 percent, the median of 26 forecasts in a Bloomberg News survey shows.

The economy is heading for its fastest pace of growth this year since 2004, giving companies room to charge their customers more. Bank of England policy makers, who noted last week that indicators of prices 'remain somewhat elevated,'are trying to contain inflation while gauging the risks to economic growth from a surge in credit costs.

"There are still price pressures in the economy," said Dominic White, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. "We see rates on hold for the foreseeable future. There's a chance they could rise, but equally there's a chance they could fall."

Traders added to bets the Bank of England will raise its benchmark rate this year. The yield on the December interest- rate futures contract rose 6 basis points to 6.39 percent.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the Bank of England's key rate for the past decade.

Core Prices

Core output prices, which exclude alcohol, tobacco, food and energy prices, rose a seasonally adjusted 0.2 percent on the month, the statistics office said. They rose an unadjusted 2.4 percent on the year, up from a 2.3 percent annual gain in July.

Overall producer prices rose on the month in five out of 10 categories, led by transport equipment, food and other products, the statistics office said.

Premier Foods Plc, the U.K.'s biggest maker of cakes and instant soup, said Sept. 4 it will meet annual profit forecasts after raising prices to cover higher wheat costs. The company said it may also consider charging more for bread and other products.

Raw-material costs, adjusted for seasonal swings, fell 0.5 percent as oil prices declined, the statistics office said. Crude oil prices slipped as low as $68.63 in August after reaching a record $78.77 a barrel on Aug. 1. On the year, unadjusted raw-material costs increased 0.6 percent.

Companies may face further pressures after the collapse of the U.S. subprime mortgage market led to a jump in credit costs, said Peter Dixon, an economist at Commerzbank AG in London.

Credit Squeeze

"If this credit squeeze leads to a slowdown in demand, that will bear on companies' pricing power," Dixon said. "Rates will remain on hold well into next year."

While the central bank's forecasts on Aug. 8 show a further interest-rate increase may be needed to get inflation under control, only five out of 22 economists in a Bloomberg News survey on Sept. 7 forecast the bank will raise the benchmark from the current 5.75 percent.

Inflation slowed below the central bank's 2 percent target in July for the first time in 16 months. The bank said Sept. 6, after its monthly rate decision, that gains in consumer prices will stay around or below the goal for the next few months.

The central bank still said that economic growth has sustained a 'solid pace' and that it is 'too soon to tell' how financial market turmoil will affect borrowing. The economy will expand 2.9 percent in 2007, the most in three years, International Monetary Fund estimates published July 25 show. That compares with its forecasts of 2 percent for the U.S. and 2.6 percent for the 13 euro countries and Japan.