Oil fuels UK producer prices rise

The higher cost of oil lifted consumer price inflation last month

The prices of goods leaving UK factories rose at their fastest rate for 13 months in January, fuelled by a jump in the cost of oil, figures show.

Producer price inflation increased to an annual rate of 3.8% last month, said the latest data from the Office for National Statistics.

This was the biggest annual increase since December 2008, and a monthly rise of 0.4% from December of last year.

The price of oil last month was 70.6% higher than a year earlier.

This is because global crude prices touched lows near $40 a barrel in January 2009 as the global recession was at its peak.

The cost of oil has since steadily recovered to about $72 a barrel this week.

'Inflation headwinds'

The OFT said the rise in producer prices - which was slightly more than expected - was further lifted by an increase in the cost of scrap metal, alcohol and tobacco.

The outlook for goods price inflation at the consumer level may prove a little bit challenging Philip Shaw, Investec economist

Core producer prices, which exclude food and energy costs, rose 2.5% on an annual basis in January.

Analysts said the latest figures raised concerns that the increase in producer prices could spread to consumer price inflation.

"It looks as though some of those inflation headwinds are greater than the Bank of England imagined," said Peter Dixon, an economist at Commerzbank.

The most recent figures from the Bank showed that UK consumer prices rose by 2.9% in December, their fastest annual pace for nine months and above the 2% target.

Bank Governor Mervyn King has warned that consumer inflation was "likely to rise over 3% for a while", but that it "should return to to target in the medium term".

Earlier this week the Bank kept interest rates on hold at 0.5%, where they have now remained for 11 consecutive months.

"Factory gate inflation is well above its long-term average, which means that the outlook for goods price inflation at the consumer level may prove a little bit challenging," said Philip Shaw, an economist at Investec.