Friday, January 8, 2010

U.K. Producer Prices Jump More Than Twice Forecast (Update1)

By Svenja O’Donnell and Scott Hamilton

Jan. 8 (Bloomberg) -- U.K. producer prices jumped more than twice as much as economists forecast in December, a sign the economy’s pickup may be fanning inflation.

The cost of goods at factory gates rose 0.5 percent from November, the Office for National Statistics said today in London. The median forecast of 12 economists in a Bloomberg News survey was for a 0.2 percent increase. On the year, prices climbed 3.5 percent, the most since January.

The British economy is showing signs of emerging from the longest recession on record, giving factories scope to rebuild margins by raising prices. The Bank of England yesterday pledged to spend the remainder of its 200 billion pound ($320 billion) bond purchase program as policy makers assessed the strength of the recovery.

“It’s a sizeable jump,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “We have thought for some time there is more price stickiness out there than people think. There are maybe more inflationary pressures in the pipeline than the Monetary Policy Committee thought.”

The pound was little changed after the report, trading up 0.5 percent on the day at $1.6029 as of 9:31 a.m. in London. The yield on the two-year U.K. government bond, which earlier rose 3 basis points to 1.289 percent, was also little changed.

Out of 10 categories of producer prices, seven rose on the month, led by products including scrap metal, transport and food. On the year, all categories increased, with the biggest gain in petroleum products, the statistics office said.

Raw Materials

Excluding food, beverages, tobacco and petroleum products, prices jumped 0.7 percent on the month and 2.6 percent on the year, the report showed.

Manufacturers are raising prices to offset higher costs of raw materials. Input prices gained 0.1 percent on the month and 6.9 percent from a year earlier in December, the statistics office said. Crude oil prices jumped 66 percent from a year earlier, driving the increase.

Victrex Plc, a U.K. maker of heat-resistant plastics for the automotive and energy industries, said Dec. 8 that margins in the year through September will be flat after a decline in sales caused fixed costs to surge and a weaker pound made imports more expensive.

Higher producer prices raise the prospect of a feed-through to inflation, which was 1.9 percent in November, the fastest pace in six months. The central bank, which targets inflation of 2 percent, predicts it will accelerate towards the 3 percent upper limit before dropping below the goal this year.

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