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Crude Oil Pushes Up Uk Producer Prices

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Merv's in a bind. Pressure from the credit crunch to lower interest rates versus pressure from inflation to raise 'em.

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http://www.ft.com/cms/s/0/ad9c747c-7585-11...00779fd2ac.html

Crude oil pushes up UK producer prices

By Delphine Strauss

Published: October 8 2007 11:42 | Last updated: October 8 2007 11:42

Higher crude oil prices pushed up raw material costs for UK manufacturers in September, suggesting inflationary pressures could build despite softening growth in industrial production, official data showed on Monday.

The Office for National Statistics said input prices rose 3.2 per cent between August and September, well above expectations and the biggest rise since the start of 2005. The annual rate of inflation in output prices rose more slowly than expected, from 2.5 per cent in August to 2.7 per cent in September, driven by higher food prices.

“Price pressures are building at the early stages of the production chain, particularly for oil and food, but still remain relatively modest at the factory gate,” said economists at the Royal Bank of Scotland, adding that higher petrol and food prices could rapidly show up in consumer price inflation.

Separately, the ONS said manufacturing output jumped 0.4 per cent in August, but the broader measure of industrial production rose by just 0.1 per cent, below expectations of a 0.3 per cent rise.

Paul Dales at Capital Economics said policymakers faced a dilemma of “slowing activity but lingering prices pressures” and said that if industrial production rose at the same rate in September, ”this would be enough to take 0.1% off third quarter GDP growth relative to the second quarter”.

The relatively modest rate of factory gate inflation contrasts with last week’s CIPS report suggesting producers raised output prices at the fastest rate since the survey began in 1999.

Richard McGuire, strategist at RBC Capital Markets, said the “continued dichotomy between producers pricing intentions... and actual output price growth” could give the Bank of England a freer hand to respond to concerns over the credit squeeze and its fallout.

However, Allan Monks, economist at JPMorgan, said the monetary policy committee was “unlikely to draw much comfort from September’s moderation in core output price inflation” that remained high relative to the past decade with a risk that producers had not yet passed on rising energy and commodity prices.

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