A commodities rout gives hope over rising costs

By Hugo Duncan for the Daily Mail
Updated: 15:23 EST, 6 May 2011

Manufacturers' raw material costs soared last month but this week’s rout on the commodities markets raised hopes relief may be on the way.

So-called ‘input’ costs were 17.6 per cent higher than a year earlier after a 2.6 per cent rise in April alone, Office for National Statistics figures showed.

Rising costs have fed through to customers with the price of goods leaving British factories up 0.8 per cent last month and 5.3 per cent on April 2010.

Costs have been driven up by the soaring price of oil which raced from below $70 a barrel a year ago to a recent high above $125. But crude dropped by a whopping 10 per cent on Thursday to $110 a barrel and tumbled another $5 yesterday to $105 before clawing back some of its losses.

It came amid a wider sell-off on commodities markets with metals such as copper and silver also on the slide. 

Samuel Tombs, UK economist at Capital Economics, said: ‘Cost pressures have continued to build in the manufacturing sector but recent developments suggest that these rises will be short-lived.

‘Oil prices now stand around $20 below where they were at the end of April. If sustained, that drop could easily knock over 2 per cent off input prices in May.’

The fall in the oil price eases pressure on the Bank of England as it struggles to keep a lid on inflation. At its quarterly inflation report next week, the Bank is expected to downgrade its forecasts for economic growth and admit that inflation is higher than it thought.

Inflation has been above the 2 per cent target since late 2009 and is now running at 4 per cent. But the Bank has left interest rates at 0.5 per cent to support the fragile recovery.