Surge in wheat prices stokes UK inflation fears

Soaring global wheat prices helped raise British manufacturers' raw material costs almost twice as fast as expected last month. The figures will disappoint the Bank of England at a time when consumer price inflation has remained stubbornly high, running at 3.1% in August, well above its 2% target. The Bank resisted calls to restart its money-printing programme to boost the economy yesterday and kept monetary policy unchanged, although economists believe the chances of more stimulus have increased overall, amid heightened concerns over a renewed slowdown. A 3.6% fall in house prices last month has triggered fears of a housing market crash . The Office for National Statistics said this morning that producer input prices rose 0.7% in September from August, taking the annual rate to 9.5% – the highest since April – from 8.7%. City economists had expected a monthly rise of just 0.4%. Simon Hayes, at Barclays Capital, said: "The [Bank of England's] monetary policy committee has long been expecting that inflationary pressures would be banished by subdued activity. The September producer price data dealt a further blow to that expectation, with both input and output prices stronger than expected. "Subdued growth may argue for more policy support, but the MPC targets inflation and the inflation data are not making it easy for the committee to respond to real economy weakness," he said. Jonathan Loynes, at Capital Economics, said: "The numbers won't do much to appease those members of the monetary policy committee who are still a bit concerned about the inflation outlook." Global wheat prices have surged in the wake of poor harvests caused by freak weather. Russia, one of the world's largest exporters, has imposed an export ban on wheat following a bad drought. UK factory-gate prices rose by 0.3% last month from August, and at an annual rate of 4.4%, also higher than expected, although it is at its lowest level since February. The ONS has decided to remove recyclables from producer output prices from October, as recyclables are now classified as a service. The change will also be applied to past data and is likely to cut annual output price inflation by at least 0.5 percentage point and possibly by as much as 1.1 percentage point, changing the picture of inflation over recent years. That aside, the question is to what extent UK manufacturers will be able to pass rising costs on to their customers in coming months. Howard Archer, at IHS Global Insight, said: "We suspect that manufacturers will find it harder to raise their prices, given significant excess capacity and likely slower expansion. The Bank of England will certainly be hoping that this is the case."