Euro Worries Outweigh Inflation; EC Finance Ministers Refuse to Intervene

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The cost of goods leaving factory gates edged higher in April, but the slim rise in so-called output prices is unlikely to trouble the Bank of England.

It will be more concerned with the continuing troubles of the euro which came under more pressure yesterday after euro zone finance ministers and the European Central Bank again put off intervening.

Official output prices showed a non-seasonally adjusted rise of 0.5 per cent in April, up 2.2 per cent on the year, and higher than analysts expected. But the rise was driven by increased prices for petrol, alcohol and tobacco - all hit by excise duty increase in the Budget.

Economists said underlying price pressures were much tamer and suggested inflation pressures would remain muted for some time. Coupled with the continuing weakness of the euro, the figures offered further backing to the doves on the Bank's Monetary Policy Committee, which managed to keep interest rates at six per cent at last week's meeting.

'If you stripped out the the more volatile elements, then the rise in output prices is more or less as expected and there should not be too much to worry about on inflation,' said Mr Peter Luxton, economist at Standard and Poors.

Output prices excluding food, drink tobacco and petroleum showed a rise of just 0.8 per cent on the year.

There was also good news on input prices - the cost companies pay for raw materials and fuel, and an early link in the inflation chain.

These fell sharply in line with the declining cost of oil, with the seasonally adjusted input price index falling 3.2 per cent in April, to stand 7.1 per cent higher on the year. The fall on the month was the largest since the date began being compiled in January 1986.

Economists said the strength of sterling would continue to restrain the impact on import costs and the consequent pressure on general retail price inflation which stands at two per cent, below the Government's 2.5 per cent target.

'Import price inflation has come in way below expectations, and we've seen a virtual halving of the year-on-year rate of input price inflation in the last few months,' said Mr Ian Stewart, economist at Merrill Lynch.

But, while companies have so far been slow to pass on higher costs in the form of higher prices, there is lingering concern that strong consumer demand could allow them to raise their profit margins at some point. …