Manufacturing costs may fuel interest rate trouble

Following the news that input costs, particularly for raw materials, jumped in January at the quickest annual rate for British manufacturers in more than two years, fears over possible interest rate and consumer inflation increases developed.

Surprising hikes in the costs of imported oil, food, metals, and various other materials generated a greater than 13% annual increase, according to the Office for National Statistics.

The Bank of England is sweating over this news, which will force consumer prices up. The consumer price inflation is double the target, at 4%, but the VAT, which is new this year, will scare the cost of living even higher.

The source of these troubles can be traced back to a 29% jump in the price of crude oil last May. The Egyptian revolt has pushed the price of oil up to $102 per barrel. The cost of imported metal has seen a push of more than 26%, food has been jacked up more than 11%, and various other materials 11% as well.

Alan Clarke, from BNP Paribas, warns us, “The numbers tell us that consumers are the target of such inflation, in the long run. The high costs are passed down the line to the end, which is the consumer. There is an attempt by the Bank to name these end-stream prices as ‘one-offs’, which are expected to vanish from the CPI inflation with time,” he continued.

The cost of goods charged by manufacturers (factory-gate prices) increased by 5% over the past year, yielding the highest annual rate since May.

The Bank of England has been more than fare, keeping the base rate at 0.5%, without a rise in 23 months. However, there is anticipated change that may occur later this year.