Output by UK manufacturing grew at its fastest rate for 2½ years in January but costs rose by the most on record, raising the prospect of higher inflation brought on by the weaker pound.
The main source of new orders was the domestic market, according to the latest survey of purchasing managers in manufacturing. Exports were also up but by less than in the previous month.
Manufacturing makes up about 10 per cent of UK gross domestic product and has been central to hopes the fall in the pound following the Brexit referendum would help rebalance the economy away from a model driven by consumption and services to exports.
Wednesday’s survey results will encourage those hopeful about growth in manufacturing but bolster the case of those worried about higher inflation.
Rob Dobson, senior economist at IHS Markit, said: “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.”
A weaker exchange rate and rising commodity prices were mainly blamed for the increase in costs, although some respondents mentioned that higher demand for goods overall was leading to a shortage of capacity.
So far the fall in the pound has had a limited effect on consumer prices as businesses have absorbed much of the increase in raw material costs. However, January’s survey showed they have started to try to pass on their higher costs to customers. Economists expect companies will increasingly pass on these costs this year.
January’s headline survey reading from IHS Markit fell to 55.9, slightly down from December’s 2½-year high of 56.1. The survey reports the proportion of purchasing managers who say January was an improvement on the previous month, so anything above 50 indicates more said it was better than not.
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