By Natasha Roberts
Date: Friday 10 Aug 2012
UK producer price inflation eased to its slowest pace in almost three years during July, indicating that the official rate of consumer price (CPI) inflation will drop further in the coming months.
According to the Office for National Statistics (ONS), the output price index for home sales of manufactured products rose to 1.7% in the year to July, its slowest rate since October 2009.
The increase was mainly the result of rising oil and food materials prices.
If retailers opt to pass on the reduction to consumers, this could bring about a decline in the official rate of inflation.
"Output prices were in line with our and the consensus expectations, being unchanged on the month," Barclays Research commented.
"Since the second half of last year both input and output price inflation have been on a marked downward trend. The fall in input prices has been primarily the result of a fall in commodity prices, especially oil which fell by almost 20% during the first six months of 2012 alone. However, since then, oil prices have increased by about 10%. Together with the recent increase in food prices, this implies some risks to the continuation of the downward trend in input costs.
"The decline in output price pressures has been feeding through to a large extent to consumer goods inflation over the same period. We think that some of the decrease in consumer goods inflation, particularly the fall in energy, has consequently contributed to the faster-than-expected fall in headline inflation this year."
Between June and July the output index for home sales of manufactured products showed no movement at all, compared with a fall of 0.6% between May and June.
In the 12 months to July, the output price index (excluding food, beverages, tobacco & petroleum) increased 1.3%, compared with a rise of 1.7% the previous month, the lowest annual rate since September 2009, when the index also rose 1.3%. The last time the annual rate was lower was in January 2007, when the index rose 1.2%.
In the same one year period, the total input price index fell 2.4%, compared with a fall of 3.0% last month.
The data also showed that between June and July the total input price index rose 1.3%, compared with a fall of 2.9% between May and June.
Barclays added: "We now expect CPI inflation to be close to the BoE's [Bank of England's] 2.0% target in the second half of this year, with the main risk to our forecast being the re-emergence of a sharp upward trend in commodity prices."
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