Input prices spell more worry for producers

www.businesseurope.com London, January 13 2003, (BusinessEurope.com)

The price of manufactured goods edged up in December at a much slower rate than raw material costs, piling more pressure on manufacturers' profit margins.

Margins are tight

Factory gate prices rose just 0.1% last month, while input prices like oil, metals and chemicals, rocketed 2.8% - 1% more than anticipated by analysts - according to the Office of National Statistics (ONS).

The price of oil was the main reason for the surprising figures. This surged 17% in December, the highest monthly increase for two and a half years. Removing food, drink, tobacco and petrol prices, underlying input prices actually fell 0.1%, said ONS.

Oil prices have been rising steadily because of fears of a possible war between the US and Iraq - the world's second biggest oil producer. A general strike in Venezuela - the fifth biggest producer - has added to this.

Over the weekend, the oil producing nations' cartel OPEC agreed to step up its production of oil by about 5% to compensate for this, although prices have remained unchanged since.

Economists said that the rise in overall input prices should not worry monetary policy makers at the Bank of England because they would be unlikely to have have much of an impact for consumers.

George Buckley, UK economist at Deutsche Bank, said: "It is the negative impact on growth from higher oil prices rather than the positive effect on inflation that we should be focusing on, especially given the fragile state of global demand."

UK producer prices have remained largely unchanged for seven months as manufacturers struggle to balance their costs with an overall lack of demand from customers.

An economic slowdown in the EU, where the UK sends most of its exports, threatens to drag the area into a recession in the first half of this year. The European Union has predicted that its economy will shrink between January and March.