The manufacturing sector continued its stellar performance when it recorded its strongest performance for 16 years, boosting hopes of an export-led economic recovery.
The Chartered Institute of Purchasing -amp; Supply's (CIPS) activity index, where a reading over 50 indicates growth, jumped to 58.3 in December, up from 57.5 in November, driven by strong orders from overseas.
But on the day that VAT increased from 17.5% to 20%, the sector delivered fresh warnings that more price rises are in the pipeline after input costs rose at their fastest in the 19-year history of the survey. The steepest price hikes were reported in the textiles, clothing, food, drink, chemicals and plastics sectors.
It is the 17th month in a row that the manufacturing index has remained above 50 and the 19th month that production rose.
The sector also created new jobs for the ninth consecutive month, only slightly down from November's record rate of job creation, fuelling hopes that the manufacturing sector can make up for the job losses in the public sector caused by Government cutbacks.
Rob Dobson, senior economist at Markit and author of the survey, said: "The UK manufacturing sector saw a truly spectacular end to 2010. The latest data are consistent with manufacturing production rising at a quarterly rate close to 2%, which should generate a meaningful contribution from the sector to economic growth in the fourth quarter to offset likely weakness in other sectors.
"All of this now points to manufacturing being a positive spur to economic recovery in the final quarter."
The input cost rises, caused by strong demand and rising energy costs, are a worrying sign for consumers.
The price rises have already been passed on to manufacturers' customers, with selling prices now stronger for the past 13 months and the rate of inflation at its highest for four months.
The price hikes will lead to further pressure on the Bank of England to raise its base rate from its historical low of 0.5%, added Mr Dobson, which would have a big impact for homeowners on tracker mortgages.