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UK Factory Costs Rise at Record Rate

10 Feb 2017 11:02:36

The weakened pound was always going to cut both ways for UK manufacturers. Following on from the vote to leave the United Kingdom, the immediate devaluing of the pound meant that yes, UK products were cheaper to buy for countries around the world, but also the costs for factories would rise in tandem.

Until January, however, manufacturing costs were being outstripped by the increase in demand for British product, both domestically and from overseas markets. Worryingly, that trend did not continue into 2017 as data firm Markit recorded the biggest ever increase in input costs for UK manufacturers, sending its input prices index to an all-time high of 88.3.

The highest reading since measurements were initially taken in 1992 is a significant rise from the already steep 77.7 recorded in December, and is high above the 50 reading which indicates no change.

More than half the firms surveyed by Markit blamed the fall in Sterling with the increase in the cost of raw materials, but factors like the rising price of oil is also a factor. Worryingly for consumers, there are initial signs that manufacturers are starting to pass these costs on to consumers, as Markit’s output index posted one of its biggest jumps ever.

If that trend is echoed around other sectors, it could indicate that the UK is in line to see some strong inflation.

Nevertheless, UK manufacturers reported a fantastic start to the year with factory output growth growing at its fastest rate in 2 and a half years. The main source of the new orders was from within the domestic market, according to the survey, as British manufacturers and companies bought stainless pipe fittings and NPT fittings, alongside other British made goods. Overseas orders also saw a slight bump in sales.

Rob Dobson, Senior Economist at IHD Markit said: “UK manufacturers have reported a bumper start to 2017, but are also seeing prices rise at an unprecedented rate. Factory output growth accelerated to a 32-month high in January, as solid domestic demand continued to drive production volumes higher. There were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroad slowed sharply.

“The big numbers coming out of the January survey were for the price measures. Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies’ link rising costs to the exchange rate. However, we’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel. With cost pressures increasingly feeding though to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months.

“The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward. Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight- month high. Taken alongside robust output growth, rising new order inflows and job creation, all signs are pointing to a solid contribution to UK GDP from manufacturing during the opening quarter of 2017.”

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