The UK Producer Price Index (PPI) data was released today, showing a 1.7 percent increase in September which was higher than the forecast 1.1 percent rise. In August the index fell by 1.9 percent.
The figures were based on a month-over-month basis and measures the change in the price of goods and raw materials purchased by manufacturers. PPI is a leading indicator of consumer inflation because when manufacturers pay more for goods the higher costs are usually passed on to the consumer. This data has added importance because it is released ahead of the CPI and gives an indication of what overall inflation will be.
According to the numbers, the so-called “factory gate” inflation rose to its highest in nearly three years, raising doubts about whether consumer price inflation will slow next year as rapidly as the Bank of England predicts.
Rising fuel costs were the main driver of inflation.
Bank of England Governor Mervyn King said in a news conference yesterday following the bank’s monetary policy meeting, that he expects consumer price inflation to hit 5 percent soon, but then to fall rapidly in 2012, as the effect of past sales tax increases and rises in the price of oil fade away. The BoE also believes that spare capacity in a stagnant economy will help push down inflation.
Yesterday the Bank of England decided to inject 75 billion pounds of stimulus into the British economy, as the euro zone crisis threatens to push the UK back into a recession which could put major downward pressure on prices in the medium term.