Factory gate prices fall 1%

Monday 10th November 2008

Prices of goods heading out of UK factories were down one per cent in October.

The reduction in prices is put down to the oil price falls, official data from the Office for National Statistics show.

Output price – or 'factory gate' - annual inflation for all manufactured products fell to 6.8 per cent in October.

Prices of goods going into factories also fell.

Input price annual inflation fell from 24.0 per cent in September to 13.8 per cent in October.

The falling prices send a clear signal that UK inflation is now heading down.

The Bank of England's mammoth 1.5 per cent interest rate cut also sanctioned on the assumption inflation – currently running at 5.2 per cent on – would now fall.

Interest rates had been held up as the Bank of England had tried to defeat inflation – which stemmed from high oil and food prices.

However, the monetary policy committee (MPC) has been criticised for paying too much attention to the long-term dangers of inflation over the short-term needs of the economy.

The cut in the base rate to three per cent is seen as an admission that the priority for the Bank of England must now be to stimulate demand and boost the economy, which is heading into a recession.

Paul Dales, UK economist at Capital Economics, explained the fall in producer prices was a green light to the MPC to cut interest rates aggressively.

"The continued decline in the oil price in recent weeks means that input price inflation will fall further in the coming months. Indeed, it might not be too long before it turns negative.

"More importantly, this sharp easing in cost pressures and the marked weakening in demand have forced firms to continue cutting their selling prices."

He added: "Overall, with price pressures fading this rapidly, there is nothing to stop the MPC from slashing interest rates all the way to one per cent or so."

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