Oil Driving UK Industrial Price Increases

Following analysis of the results of its May 2008 Industrial Trends Survey, the Confederation of British Industry (CBI) warned that the price of UK manufactured goods would rise steeply in coming months, even as activity in the sector slows.

The highest balance of manufacturing firms since 1995 have told the CBI that their products will get more expensive over the next three months because of rising oil prices driving up their costs. At the same time, however, manufacturers in the aggregate say that their order books are below normal and that they don’t expect output to grow in the next quarter.

In the May CBI Industrial Trends Survey, conducted between April 24 and May 14 and eliciting responses from 543 manufacturing firms, 21% of the participating companies characterized their total order book as above normal and 31% said it was below, yielding a balance of –10. The balance for export orders was –12.

Firms also do not expect their volume of output to grow over the next three months, believing rather that it will flatten out (a zero balance, as with CBI’s April survey).

Despite shrinking demand, 36% of manufacturers expect to raise prices over the next quarter. Only 6% say their prices will come down. The balance of +30 is the strongest since February 1995. This figure coincides with the price of a barrel of oil averaging $118.10 during the survey period, and rising month-on-month by 14%.

Meanwhile, metals prices rose almost 5% between April and May, food continued to become more expensive, and the pound slipped against the dollar. These general cost pressures are being felt intensely among capital goods firms, such as machinery and plant manufacturers, who feel a need to pass them along, says the CBI.

However, according to the CBI, it is the makers of intermediate goods, which include energy- and commodity-intensive industries, who continue to expect the highest rate of price inflation.

“The survey shows that the sector is now being affected by the slowdown seen in other areas of the economy,” says Ian McCafferty, chief economic adviser at the CBI. “For the second month in a row, firms are saying orders are below normal and that output levels will be flat.”

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