Factory data raises fears of interest rate increase

The price of goods leaving British factories climbed again last month, driven by rising world commodity increases and a determination by manufacturers to pass on higher costs to customers.

Economists raised fears of inflationary pressures that could feed into the wider economy and encourage the Bank of England to raise interest rates again.

The Office for National Statistics said yesterday headline output prices rose 0.2% on the month in August to stand 2.6% higher than a year earlier, the same figures as the previous two months and the strongest for eight years, largely because of surging oil prices. "Core" factory gate prices, which exclude volatile elements such as food and oil, rose a much stronger than expected 0.5% on the month - the biggest jump since July 1995 - to stand 2.1% higher than a year ago, the steepest annual inflation rate since June 1996.

The increase was mainly due to the rising world price of scrap steel. There has been strong demand, particularly from China, while shortages in the United States have pushed up prices further in recent weeks. As a result, steel group Corus is expected to report a profit this week for the first time since it was formed from a merger of British Steel and Hoogovens of the Netherlands five years ago.

"The data are a bit disturbing. The key question is whether this will filter through to the high street and the monetary policy committee will be vigilant about inflation," said Philip Shaw, the chief economist at Investec.

Input prices - the cost of industry's raw materials - rose strongly, by 1.6% on the month and 4.8% on the year, mainly owing to a 17.8% annual rise in crude oil prices. Core input prices increased 0.7% on the month to stand 1.9% higher on the year, the biggest annual rise since April 2001.