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Factory gate inflation rate rises in December

The price of goods leaving UK factories rose faster in December than in the previous month, largely due to the increased price of oil, the Office for National Statistics (ONS) has said.

Annual producer output price inflation rose to 4.2%, compared with an upwardly revised 4.1% in November.

The biggest factor in the rise was a 12.8% increase in petrol prices.

Increases in factory prices enhance concerns over knock-on effects for consumers, analysts say.

While the cost of finished products rose more sharply in December, the cost of the raw materials used to make them climbed even more rapidly, suggesting that factories absorbed some of their extra costs and did not pass them on to retailers.

Input costs rose by 12.5%, up from a 9.2% increase in the previous month.

"This is primarily an oil and commodity price effect," said Peter Dixon at Commerzbank.

"It is going to raise pressure on the Bank of England [to raise interest rates] because output prices were up 0.5% on the month, which is quite a chunky amount."
'Growing unease'

Consumer price inflation (CPI) is running at 3.3%, way above the Bank's 2% target, while retail price inflation - which includes mortgage interest payments - is currently 4.7%.

The Bank has said it expects inflation to fall back in the medium term, and kept rates on hold on Thursday at 0.5% for the 22nd month in a row.

It wants to keep rates low for now to boost demand to secure the economic recovery.

However, there is mounting speculation that it may be forced to raise rates sooner than previously expected due to continuing rising prices.

Rising energy costs due in large part to the rising price of oil, higher food prices due to the increasing cost of basic commodities, and the increase in VAT to 20% this month, are all putting upward pressure on the inflation rate.

And December's factory price figures will by used by those calling for a rate rise as further evidence of the need for action sooner rather than later, analysts say.

"The Bank will have had these numbers at yesterday's meeting and I think the minutes will show growing unease about inflation," said Alan Clarke at BNP Paribas.

In each of the last three monthly meetings of the Bank's rate-setting Monetary Policy Committee, member Andrew Sentance has called for rates to rise in order to cool inflation.

BBC News

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