Manufacturers hit by rising commodity prices and weak pound as input costs soar
Britain's manufacturing industry was hit by a double whammy of rising commodity prices and a weaker pound which sent input costs to record highs in January.
The closely watched Markit/CIPS UK Manufacturing purchasing managers' index (PMI) showed that average purchase prices rose at the fastest rate in the survey's 25-year history, as fuel, oil, plastics and steel costs and the post-Brexit slump in sterling weighed on the industry.
Subsequent efforts to pass on part of the cost increase led to a sharp rise in selling prices, the survey showed, with output charges rising at nearly the fastest pace on record.
But manufacturers still notched up output growth in January, with the PMI survey indicating a reading of 55.9, lower than 56.1 in December, but in line with economist expectations.
A reading above 50 indicates growth.
Domestic orders were a driving force behind January's output growth, though the effects of a weaker pound on exports was starting to wane.
Growth from new business abroad "slowed sharply" compared with the previous month.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "This emphatically shows that the benefits to manufacturers from sterling's depreciation remain far too modest to outweigh the costs for the rest of the economy in terms of high inflation."
However, the pound rose following the news to trade 0.5% higher against the US dollar at 1.264 by midday, and 0.5% higher versus the euro at 1.171.
Results from the Confederation of British Industry's (CBI) own survey released last week indicated that unit costs rose at the fastest rate in more than five years in the three months to January, with companies now expecting further price pain over the next quarter.
Rob Dobson, senior economist at IHS Markit, which compiles the survey, said th e real question now is whether pressure from cost inflation will drag on manufacturing growth in the months ahead.
However, he noted that companies seem "fairly sanguine" on the issue, given that optimism among businesses is at an eight-month high.
"Taken alongside robust output growth, rising new order inflows and job creation, all signs are pointing to a solid contribution to UK GDP from manufacturing during the opening quarter of 2017."
The report showed that nearly 51% of respondents expect output to rise over the next 12 months, reflecting new market opportunities and planned product launches.
Industry employment rose for the sixth consecutive month in January, though at a weaker rate than a month earlier.
It came mostly from small and medium-sized businesses, while job creation at larger producers was "only mild", the survey showed.
Lee Hopley, chief economist at manufacturing organisation EEF, said: "Of course every silver lining has a cloud and we know that is the return of inflation in 2017.
"With mounting evidence of pricing pressures across the industrial sector, the pass through to consumers is certainly on its way.
"This does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth."