Raw materials costs soaring

THE intense pressure faced by manufacturers was vividly illustrated today by figures showing raw material costs soared in March at their fastest pace on record.

Boosted by spiralling oil, producers' input prices rose by 1.8% during the month to stand 11.4% higher than a year earlier - the highest annual rate since records began in 1986. Crude oil prices were a staggering 51.2% higher than March last year.

But fierce competition means manufacturers were unable to pass on these higher costs at the factory gates and their profit margins were squeezed further. Producers' output prices rose by 0.6% in March and were only 2.8% higher than a year earlier.

Simon Rubinsohn, an economist at brokers Gerrard, said: 'Manufacturers' volume figures are flat on their back and hopes for a pick-up in pricing power have failed to materialise. Going forward, the only hope is that raw material costs fall away but, with oil prices continuing to hover near record highs, that looks unlikely.'

Manufacturers' inability to lift their prices is good news for the inflation and interest rate outlook, however. Daragh Maher, an analyst at Calyon, said: 'It is questionable whether the Bank of England will believe higher interest rates would be the appropriate policy response to energy-induced inflation unless the latter generates high wages. So far, that has not proven to be the case.'

Meanwhile, separate figures showed that Britain's trade deficit shrank to £4.8bn in February from £5bn in January. The narrowing was largely due to a fall in imports, indicating that fewer foreign goods are being sucked in as consumer spending slows down.

Economist Howard Archer at Global Insight said: 'UK exporters still face the double problem of strong pound against the dollar and subdued domestic demand in key eurozone markets.'