Oil Pushes Up Manufacturers’ Costs

LONDON - Manufacturers’ raw material costs rose at their fastest monthly rate in more than a year in August, driven up by oil costs and resulting in the smallest year-on-year rate of decline since April.

But faced with ongoing recession, manufacturers were slower to pass on August’s 2.2 percent monthly rise in input costs and only raised factory gate prices by 0.2 percent in the month, the same as July’s pace of increase.

Manufacturers’ input costs and output prices were higher than economists had forecast on both a monthly and an annual basis, in large part because of a hefty 9.4 percent monthly rise in crude oil inputs.

Factory gate prices were 0.4 percent lower year-on-year in August, compared to a 1.3 percent decline in the year to July, while input prices were 7.5 percent lower than August last year, much less than July’s 12.2 percent annual decline.

“The monthly increase in input prices stands out and it seems to reflect the strength in oil and other commodity prices during the period,” said Stephen Lewis, chief economist at Monument Securities.

“We are beginning to see the base effects from last year unwinding, and that is going to be a feature in the months to come,” he added.

The price of a barrel of North Sea oil was around $70 at the start of August, almost half the $120 level seen a year earlier. But oil prices fell sharply in the second half of last year to bottom out at $36 in December, meaning there will be an increasingly unfavourable year-on-year price comparison.

The figures raise the possibility that next week’s consumer price inflation data risk surprising on the upside, though analysts noted manufacturers had not yet passed on most of their higher costs.

“UK producers opted to absorb the unexpectedly sharp rise in costs in July, resulting in lower margins rather than higher pipeline price pressures,” said Richard McGuire, strategist at RBC Capital Markets.

Factory output has recently shown surprisingly strong growth, raising the risk that the limited pass-through of costs could be transitory, but McGuire said the imminent end of temporary production incentives — such as a scrappage scheme for old cars — was likely to again reduce pricing power.

Inflation in Britain has been stickier than in many of its trading partners during the economic downturn, in part because of sterling’s fall against the euro and dollar over the period.

The ONS said the monthly rise in output prices was largely down to price rises for petroleum products, chemicals and other manufactured products, which were only partly offset by lower tobacco and alcohol product prices.

On the year, lower petroleum prices were still the biggest factor depressing the inflation rate, though higher tobacco, alcohol and transport costs negated most of the downward impact.

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