UK factories saw costs rise at a record pace at the start of 2017, pointing to increasing upward pressure on inflation that could weigh on the economy this year.
A measure of input prices in IHS Markitâ€™s monthly Purchasing Managers Index jumped to the highest since the series began in 1992, it said on Wednesday. The headline activity index for manufacturing was at 55.9, comfortably above the key 50 level that divides expansion from contraction, and a measure of output rose to the highest in almost three years.
The surge in costs reflects the poundâ€™s drop since the Brexit vote and an increase in the price of oil and raw materials such as plastics and steel. As that filters through to other parts of the economy, it could put a squeeze on households and damp consumer spending, one of the main engines of growth in recent years.
Manufacturing lobby group EEF highlighted this risk, saying thereâ€™s â€œmounting evidenceâ€ of pricing pressures across industry. â€œThis does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth,â€ said EEF Chief Economist Lee Hopley. The pound rose for a second day, advancing 0.3 percent to $1.2619 as of 11:10 a.m. London time. Ten-year gilts declined.
The pass-through from the exchange rate is also an issue for the Bank of England, which will publish new forecasts for growth and inflation on Thursday alongside its latest policy decision. While itâ€™s focused on supporting the economy through potential volatility related to the UK decision to leave the European Union, its capacity could be constrained by a continued pickup in prices.
Consumersâ€™ inflation expectations for the next year rose to 2.6 percent in January, Citigroup said on Wednesday, up from 2.4 percent in December. Longer-term expectations remained at 3 percent.
Markit also noted that while the weaker pound continues to squeeze manufacturers, the positive exchange-rate impact on exports appears to be â€œwaning.â€ The report showed growth in new overseas business slowed sharply in January.
However, Rob Dobson, an economist at Markit, said that companies seem â€œfairly sanguine,â€ with a gauge of business confidence at an eight-month high, and said manufacturing could be a â€œsolidâ€ boost growth this quarter.
â€œIt looks as though the sector will continue to make a positive contribution to GDP in the first quarter,â€ said James Knightley, an economist at ING in London. â€œHowever, the consumer sector is showing some cause for concern following the sharp drop in consumer borrowing, weak confidence and the squeeze on spending power.â€