Rate rise looms as factory costs climb at fastest pace in two years

Policymakers at the central bank are having to weigh stubbornly high inflation data against signs that the economic recovery may have stalled.

On Thursday, they voted to keep interest rates at their historic low of 0.5 per cent for the 23rd month in a row, but many analysts are predicting a rise before the summer.

Howard Archer, chief UK economist at IHS Global Insight, said yesterday's statistics offered "more nasty news on the inflation front for the Bank of England to digest".

The official data also showed that factory output prices rose 4.8 per cent on the year, the highest annual rate since last May. On the month, prices jumped 1 per cent, double what economists had predicted.

Archer said: "With manufacturing activity seemingly still buoyant at the moment and input prices surging, the very real risk is that producer prices could rise significantly further in the near term at least.

"Further out, the hope for the Bank of England is that significant excess capacity and likely slower expansion will put a lid on prices, hopefully along with moderating input prices."

Brian Hilliard, UK economist at Societe Generale, added: "This is one more troubling piece of evidence for the (Bank of England's] monetary policy committee to consider when weighing up the inflation story.

"It appears manufacturers are gaining increasing pricing power."

The central bank is due to publish its latest quarterly forecasts for inflation and growth on Wednesday.

On Tuesday, figures from the Office for National Statistics (ONS) are expected to show that consumer inflation rose to more than 4 per cent in January - twice the Bank of England's target rate.

George Buckley, at Deutsche Bank, noted there was an 80 per cent correlation between annual consumer and producer price inflation, and predicted consumer inflation would average more than 4 per cent over 2011.

Bank of England Governor Mervyn King has suggested that inflation could spike at 5 per cent later this year before falling. He maintains that inflation is driven by external factors over which the central bank has no control, and one-off domestic factors such as the rise in VAT.

The ONS said the rise in factory input prices was mainly driven by a 28.8 per cent annual rise in the price of crude oil - the biggest increase since May.The recent rise in commodity prices also played a role, with imported metals prices up more than 26 per cent on the year.

The price of Brent crude oil stood at about $102 yesterday.

• The US trade deficit widened in December to its highest level in four months, according to a report pusblished yesterday that also showed that the annual trade gap expanded nearly 33 per cent in 2010 as imports from China hit record levels.