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2 yrs
Published in Saudi Press Agency on 10 - 07 - 2009


British factory costs fell in
June at their sharpest annual rate since 1997 and output prices
dropped at their fastest in 7-1/2 years, suggesting inflation
will fall sharply in the coming months, Reuters reported.
The Office for National Statistics said on Friday output
prices -- of goods leaving the factory gate -- fell 1.2 percent
year-on-year, the sharpest drop since December 2001 and more
than the 0.8 percent fall expected by analysts.
Input prices fell 11 percent on the year, less than
forecasts for a 12.2 percent decline but still the weakest
annual rate since April 1997.
But crude oil prices jumped 14.3 percent in June alone, the
biggest monthly rise since January 2005.
"My sense is that given the increase in crude oil prices,
input prices will climb again," said Amit Kara, economist at
UBS. "Output prices will stay under pressure in the immediate
future because of the economic slowdown."
Inflation went up sharply last year because of record high
energy prices but Bank of England policymakers are expecting it
to come down just as swiftly in the coming months as Britain
battles its deepest downturn in decades.
The central bank has slashed interest rates to a record low
of 0.5 percent and launched an unprecedented 125 billion pound
asset purchase scheme to get money flowing through the economy
again to kick-start a recovery.
Recent surveys have suggested conditions are starting to
stabilise and the BoE shocked markets this week by not expanding
its quantitative easing programme, prompting concerns it is
preparing to start winding down its stimulus to the economy.
The central bank's new forecasts for inflation and growth in
August hold the key to the future of the programme and analysts
said policymakers were probably right to want to tread
cautiously until they have that information.
The path of inflation going forward is unlikely to be smooth
as a recent pick-up in oil prices puts upward pressure on
inflation in the near term and beneficial base effects from
rising oil prices last year will soon subside.
On the other hand, weak demand is likely to keep up the
pressure on manufacturers to lower prices.
Friday's data showed output prices excluding the volatile
components of food, drink, tobacco and petrol, rose just 0.1
percent on the year -- a 5-year low.
"Any sign that deflationary pressures are broadening out
will be a cause for concern for the Monetary Policy Committee,
particularly as spare capacity will put downward pressure on
prices and margins over the next eighteen months or so," said
Colin Ellis, economist at Daiwa Securities.


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