Smaller manufacturers saw demand for their goods soar at its fastest rate for 16 years during the first quarter of the year.
The volume of domestic and export orders among small and medium-sized firms rose at its fastest rate since April 1995 during the three months to April, according to the Confederation of British Industry (CBI).
But it warned that production costs continued to increase rapidly, putting pressure on companies' profit margins, particularly for smaller firms.
A balance of 16% of firms reported a rise in domestic orders during the three months, while a balance of 23% said export orders were up.
The strong demand at home and abroad, combined with stock rebuilding, also helped to push up output, with a balance of 18% of firms saying production rose, compared with 13% during the previous quarter.
The jump in output led to 16% more firms increasing the number of staff they employed, compared with those who decreased it, the highest level since January 1995.
But companies continued to come under pressure from higher costs, with a balance of 53% of firms saying their average unit costs rose, a level last seen in October 2008 and an acceleration from already strong increases during the past year.
These higher costs led to the steepest domestic price hikes since April 1995, while export prices rose at their fastest pace since the survey began in October 1988.
Lucy Armstrong, chair of the CBI's SME Council, said: “Smaller manufacturers are enjoying strong demand for goods at home and abroad, underpinning robust growth in production.
“However, inflationary pressures remain a dark cloud, with rising oil and commodity prices pushing up the cost of production and eating into profit margins.
“Manufacturers have raised output prices rapidly to cope, and expect to continue doing so over the next quarter.”
Inflationary pressures show no sign of easing in the coming quarter, with a balance of 52% of firms expecting costs to increase sharply again.
Firms expect demand to continue to strengthen, although at a slower rate than earlier this year.
But 25% of firms cite plant capacity as a potential constraint on output during the next three months, the highest figure since October 1988.
The volume of domestic and export orders among SME firms rose at its fastest rate since April 1995, according to the CBI