Britain's leading employers organisation has highlighted the acute inflationary pressures facing industry as it warned that higher prices were likely to be passed on to customers over coming months.
In its monthly snapshot of manufacturing, the CBI said UK firms were being buffeted by dearer commodity prices and the rising cost of imported goods.
Almost one third of manufacturers were planning to raise factory gate prices over the next three months while only 5% of firms said prices would be cut. The rounded balance of +27 points was up from +24 points in May and from +9 points in June 2010.
The CBI said cost pressures were proving a particular problem for large firms with more than 500 employees, who were predicting their fastest price increases since 1989, when inflation was rising strongly and on course to hit a peak of 9.5% the following year.
Ian McCafferty, CBI chief economic adviser, said: "Inflationary pressures remain acute. High commodity prices and import costs mean firms still expect to raise factory gate prices markedly over the next three months."
He added: "UK manufacturers currently have healthy order books. Factory output is still set to rise solidly over the coming quarter, but expectations for growth have moderated compared with recent months, when output prospects were particularly strong. This reflects the slightly softer patch for manufacturing evident in other economies, much of which appears due to the temporary supply chain disruptions following the tsunami in Japan."
Despite the evidence of solid demand from the CBI, a member of the Bank of England's interest rate setting committee said the economy remained fragile and might need a fresh injection of electronic money if it got stuck in a deflationary rut.
Paul Fisher pushed sterling lower on the foreign exchanges after he said the Bank might need to revive its quantitative easing programme.
"If we get stuck in a deflationary rut it's not clear we have sufficient ability to get out of that quickly," Fisher said.
"I've said in the past it [QE] is still very much on the table as one of our potential policy actions, and it's certainly not ruled out and people need to be aware of that."
The Bank pumped £200bn into the economy through QE in an attempt to lift it out of its longest and deepest recession since the second world war. One MPC member, Adam Posen, has voted consistently for a further £50bn of QE but has been a lone voice on the committee.
Fisher defended the Bank's decision to allow inflation to rise well above the government's 2% target, and that increasing borrowing costs would have caused an even worse outcome for the economy.
"The MPC are trying to set the best path back to the inflation target, but even the best path is an extremely uncomfortable one", Fisher told a conference in London.
From / Guardian