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Britain’s manufacturing sector is facing its steepest input price inflation in a quarter of a century, according to the latest monthly survey of factories carried out by Markit.
The UK’s factory sector continued to grow in January, reporting its highest output levels in 32 months, but rising prices are beginning to bite.
Markit’s survey revealed just over half of firms surveyed attributed higher inflation to sterling’s drop since the Brexit vote, with climbing energy and commodity prices making it likely higher costs are being passed on to customers.
“With these ongoing cost burdens, manufacturers were no longer able to absorb these costs themselves as output prices grew at one of the fastest rates since records began. Consumers must soon be wondering whether these rising costs will impact on their daily life”, said David Noble, chief executive at the Chartered Institute of Procurement & Supply.
Howard Archer at IHS Markit called price developments a “large fly in the ointment” that could help push up consumer inflation to 3 per cent later this year.
Although the weak pound has helped boost competitiveness in the manufacturing sector, foreign demand for UK goods is also tailing off, according to the January survey.
“The recovery is now solely dependent on domestic demand”, noted Samuel Tombs at Pantheon, who added:
The new export orders balance collapsed to 50.9 in January—its lowest level since May—from 58.5 in December. This emphatically shows that the benefits to manufacturers from sterling’s depreciation remain far too modest to outweigh the costs for the rest of the economy in terms of high inflation.
Ruth Gregory at Capital Economics takes a more sanguine approach and thinks the sector will enjoy a better 2017 compared to last year.
The three-month average of the survey’s output balance is consistent, on the basis of past form, with very healthy quarterly gains in manufacturing output of nearly 2%, following growth of just 0.3% in 2016 as a whole.
As such, this adds weight to our view that the manufacturing sector will fare better in 2017 than it did in 2016. And with the forthcoming rise in inflation set to hit the recently strong-performing consumer services sector, this could result in a rare period of outperformance of the manufacturing sector over the services sector this year.
Related reading: Charlie Bean warns of a “significant slowing” in the UK eocnomy