Deflation Threat Raised by Falling Factory Costs
Monday, December 8, 2008 7:07
Factory gate inflation peaked at 10% in July this year. But as the cost of raw materials continued to fall sharply, the factory gate inflation eased again last month. This situation fuelles the expectations that the Bank of England will have to cut interest rates again to stave off the threat of deflation.
According to the Office for National Statistics, following a record drop of 5.6% in October, which is the biggest decline since 1986, the input price index, which measures prices paid for materials and fuels, has fallen by 3.3% in November.
In recent months, oil and commodity prices have tumbled and the 2.5% point cut in VAT will also drive down prices. Economists said that the sharp falls indicated that consumer prices would also plunge in the coming months.
Consumer Price Index inflation fell to 4.5% in October, down from a 16-year high of 5.2% in September, and it is forecast by the Bank of England that it will fall well below its 2% target next year.
However, according to analysts in economic consultancies, it’s very likely that consumer price inflation will move back below the Bank of England’s target level in the early months of the coming 2009 and will turn negative during the second half of the year. And the sharp fall in inflation would likely pave the way for more rate cuts by the Bank as it strives to boost economic activity.
According to Paul Dales, UK economist at Capital Economics, the further fall in UK producer prices in November provides more evidence that deflation is now becoming the greatest policy concern.
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