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Last Updated: Oct 28th, 2008 - 17:57:18 |
LONDON (Reuters) - Factory gate prices fell at their sharpest monthly rate in at least 22 years in August and firms' costs also dropped more than expected, in a sign the fall in world oil prices may soon start bringing inflation down.
The Office for National Statistics said on Monday that unadjusted output prices fell 0.6 pct on the month because of lower petrol and scrap metal prices.
That brought the annual rate of factory gate inflation down to 9.7 percent from 10.3 percent the month before.
Input prices dropped by 2 percent, also mainly because of lower oil prices, though still leaving them nearly a third higher than a year earlier.
Economists said the figures augured well for headline consumer inflation peaking next month and then falling sharply over the next year, giving the Bank of England scope to cut interest rates to revive a stuttering economy.
"Today's substantial decline may mark a significant easing in medium-term inflation pressures as cost pressures, inspired by some of the excesses of global demand, finally appear to be abating," said David Page, economist at Investec.
"This would be a massive boost for the Bank of England's Monetary Policy Committee as it struggles to balance the needs of a sickening economy against a still worsening consumer price inflation outlook."
Interest rate futures gained after the data and sterling, already down sharply this month, slipped further as investors upped bets on rate cuts before the end of the year.
The Bank held interest rates at 5 percent last week for the fifth month running despite the economy standing still in the second quarter as inflation is running at more than double the central bank's target.
It could up further next month because of huge tariff increases by utility companies but most economists expect a sharp fall over the next year as world oil prices come down from the record highs reached a few weeks back.
FOOD STILL A PROBLEM
Against the beneficial impact of lower oil prices, however, is the sharp fall in sterling over the last few weeks, which is adding to upside risks for inflation as it makes imports more expensive.
Nor has food price inflation, the other main source of price pressures in the last year, gone away. Monday's data showed factory food prices up a record 12.5 percent on the year.
And while wheat costs fell sharply on the input side, this was more a result of only poorer quality crops being available as cereal harvests had been delayed, the ONS said.
"With prices for imported foods up about 20 percent year-on-year, CPI food price inflation is likely to stay high in coming months," said Michael Saunders, economist at Citigroup.
Associated British Foods said on Monday growth in its grocery divisional profits and sales was strong in the second-half after price increases offset commodity cost rises, with its Kingsmill bread loaf in the UK seeing a 10p rise to 122p over the summer.
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