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UK Producer Price Inflation Hits 16-Year High

UK factory gate inflation surged to a 16-year high in January, while input price inflation reached an all time high, official data showed on Monday.

Evidence of the sharply rising prices will pile pressure on the Bank of England as it struggles to control inflation while attempting to stimulate a slowing economy, Jean-Michel Six, chief European economist at Standard & Poor's, told "Power Lunch Europe."

"It's a prefect illustration of the conflict that the central banks are currently facing. On one side we’re seeing an economic slowdown, but on the other side the inflation pressures remain very strong," Six said Monday.

Sterling rose as the stronger than expected figures indicated the Bank of England may not be able to cut interest rates as fast as the market had been expecting.

The Office for National Statistics said that output prices rose 1.0 percent on the month last month, taking the annual rate up to 5.7 percent from 5.0 percent in December. Analysts had expected an annual reading of 5.1 percent.

"We had been expecting a further increase in output price inflation but these figures are unequivocally awful," said Philip Shaw, an economist at Investec.

Core output price inflation also rose much faster than expected. It was 0.8 percent on the month, the fastest monthly rate since records began in 1986.

Input price inflation surged to 18.9 percent on the year in January, likewise the strongest rate since the series began 22 years ago.

Crude oil prices rose 70.3 percent on the year in January, the highest rate in nearly 8 years, while domestic food prices soared 36 percent on the year -- a record high.

"It does flag the upside inflation risks and we would expect it to come through in the consumer price index over the next few months with targeted inflation rising above 3 percent," said Alan Castle, an economist at Lehman Brothers.

CPI inflation figures are due on Tuesday. BoE Governor Mervyn King has warned that there is risk that inflation will rise well above its 2 percent target in the near future.

The BoE cut interest rates last week to 5.25 percent to help shore up economic growth but if inflation rises sharply, its ability to take further growth-boosting action will be limited.

Separate figures showed Britain's trade deficit with the rest of the world was worse than expected in December at 7.574 billion pounds. Economists had expected a reading of 7.35 billion.

Contact Europe: Economy

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