Factory gate prices hit 16-year high

Rising food and fuel costs pushed annual output price growth to its highest level since August 1991 last month. Factory gate prices the cost of goods going from manufacturers to wholesalers - rose to 5% in December, compared to 4.5% the previous month.

Analyst Howard Archer of Global Insight described the figures as pretty nasty' on the BBC this morning, adding that they had probably played a part in the Bank of England's decision to keep the base rate on hold at 5.5% last week.

It's little wonder that factories are hiking prices their costs are soaring. Input price inflation has leaped to 11.2% as food prices boom, driven by rising demand from the developing economies of Asia plus the US government's misguided support for biofuels (read more about rising food prices here: Why food will cost you more in 2008).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At the same time, the plunging pound is driving up the cost of imported goods - and with the UK's economy expected to weaken, sterling's fortunes don't look likely to change any time in the foreseeable future.

The bad news for the consumer and for Mervyn King and his colleagues at the interest-rate-setting Monetary Policy Committee is that producers continued to pass higher costs along the supply chain in December. Capital Economics reckons that slowing demand on the high street should make it harder for rising producer prices to feed through to the high street in the form of rising consumer prices. However, that's not necessarily good news the more producers are forced to swallow rising prices, the more they need to find cuts elsewhere, saving money through redundancies, for example.

In any case, today's data certainly highlights the difficult situation which the Bank of England's rate-setting committee currently finds itself in. With inflationary pressures on the one hand and slowing growth on the other, the MPC is having to navigate a very treacherous course. CPI is currently at 2.1% - above the Government's 2% target whilst the more realistic retail price inflation (RPI) measure is running at 4.1%.

As Liam Halligan wrote in The Sunday Telegraph yesterday, UK inflation is on an inexorable upward trend'. The next few months will bring a lot of nasty shocks for consumers, in the form of higher utility and council tax bills, firmer petrol prices, not to mention the soaring cost of the weekly shop.

So whilst the faltering high street and falling house prices may be dominating the news at present, behind the scenes there are plenty of reasons to hope that the Bank of England stays firm and resists a rate cut next month.