Sharp drop in inflation likely after record factory price falls
‘This bodes well for a fall in core consumer price inflation further ahead,’ said Jonathan Loynes of Capital Economics
Further sharp falls in inflation were looking likelier today after figures showed factory raw materials prices fell at their fastest pace for 12 years last month while factory gate prices saw their biggest fall for more than seven years.
Official data showed output prices were down a bigger-than-expected 1.2% in June compared to a year earlier while input costs slumped 11% over the same period.
Although oil prices were up 14% in June, pushing input prices up 1.5% on the month, they have since fallen sharply and were trading at around $60 a barrel this morning, down from over $71 a barrel at the beginning of this month.
“The clear message is that, despite some tentative indications that conditions in the manufacturing sector have started to improve a bit, producers are under intense pressure to cut their prices. Needless to say, this bodes well for a fall in core consumer price inflation further ahead,” said Jonathan Loynes, chief UK economist at Capital Economics.
Howard Archer at Global Insight said: “June’s retreat in producer prices reinforces the belief that consumer price inflation is headed down significantly further over the coming months.
“The data reinforces the belief that the Bank of England could yet very well increase its quantitative easing (QE) programme in August, particularly if the economic and lending data disappoint over the coming month,” he added, referring to the Bank’s annoucment on Thursday that it would review the scale of its QE programme at its next interest rate meeting in early August.
Today’s producer price figures come on the heels of very weak manufacturing output data this week which raised fears that the sector’s tentative recovery in recent months may be petering out.
