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July 10, 2009    

Factory prices in steepest fall since 2001

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by Kay Murchie

The Office for National Statistics has today revealed that the cost of goods leaving UK factories fell at the sharpest pace in 8 years in June due to a slump in demand.

Output prices fell by a larger than expected 1.2%, quadruple the 0.3% decline recorded in the year to May and puts further downward pressure on inflation.

Analysts had forecast a 0.8% decline.

Meanwhile, the cost of raw materials fell at the fastest rate in over a decade with an 11% fall in the year to June but rose 1.5% during the month, driven by rising oil prices.

According to Jonathan Loynes, chief European economist at Capital Economics, “The clear message is that, despite some tentative indications that conditions in the manufacturing sector have started to improve a bit, producers are under intense pressure to cut their prices.”

“Needless to say, this bodes well for a fall in core consumer price inflation further ahead,” added Mr Loynes.

Meanwhile, Howard Archer at Global Insight, said today‘s figures reinforces the belief that consumer price inflation is headed down significantly further over the coming months and could see the Bank of England expand its quantitative easing plan in August.

Yesterday, the Bank of England’s Monetary Policy Committee elected to keep interest rates on hold at 0.5% - the fourth consecutive month rates have been left unchanged.

The Bank said it would review its quantitative easing programme at next month’s meeting.

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