UK economy: Inflation worries build as manufacturing cost pressures surge
Input prices for UK manufacturers rose at the fastest pace in two years in January, a new business survey shows, pointing to continued inflationary pressures in the economy.
S&P’s purchasing managers’ index (PMI) for the manufacturing index showed that input prices increased at “accelerated rates” last month.
The survey showed that many suppliers had increased prices to reflect their own additional costs, while firms also dealt with higher transportation costs and shortages of key materials.
“Cost pressures are rising and will likely continue to do so as changes to the minimum wage and employer NI announced in last year’s Budget feed through,” Rob Dobson, director at S&P Global Market Intelligence said.
Alongside rising cost pressures, the PMI showed that the manufacturing sector remained in contraction in January, although posting a slight recovery from December’s 11-month low.
The overall index stood at 48.3 in January, up from 47.0 the month before and marginally higher than the earlier ‘flash’ estimate. Anything below 50 indicates contraction.
“Weak demand and lacklustre business and consumer confidence were the main factors underlying the latest scaling back of output volumes,” the survey said, noting that the downturn was particularly pronounced in consumer goods industry.
The level of incoming new work decreased for the fourth straight month as firms cut back on non-essential spending in the wake of the Budget tax hikes.
Firms also cut staff at the fastest pace in almost a year due to the extra costs, while business optimism remained near its lowest level in two years.
“Lacklustre sentiment was blamed on government policy, recession fears, rising costs, higher interest rate expectations and cutbacks to nonessential spending,” the survey said.
According to S&P, manufacturing has been in contraction for four of the past five months.
The survey reveals the difficult balance facing the economy ahead of the Bank of England’s interest rate decision later this week.
Traders expect the Bank to cut rates, but the outlook for the remainder of the year is less clear due to the resurgence of inflationary pressures.
“A stagnant economy and rising cost burdens leave policy makers with a real dilemma, balancing the need for rate cuts to support flagging growth and a declining labour market against the need to contain inflationary pressures,” Dobson said.