The largest number of British manufacturers plan to raise prices in the next three months than at any point since 1976, according to a business survey that underscores the inflationary pressures hitting the UK economy.
With energy prices rocketing and wages on an upward path, the CBI said four-fifths of firms expect to increase the cost of manufactured goods in the next three months.
Not since the oil shocks of the mid-1970s has such a broad swathe of the manufacturing sector found itself needing to increase prices, pushing a net balance to +77% of firms that say prices will need to rise, up from +66% in January, according to the business lobby group.
Order books remained strong in February as the global demand for manufactured goods remained healthy.
By some measures the global demand for goods has increased 20% on pre-pandemic levels during the pandemic, putting upward pressure on the cost of raw materials and the price of energy on international markets.
The survey showed a net balance of +20% of factories reporting rising orders, down from +24% in January. While this was the weakest reading for four months, the CBI said it was still well above the survey’s long-run average.
The CBI deputy chief economist, Anna Leach, said: “Manufacturers will be buoyed up by strong order books and output growth, but amid ongoing cost pressures, almost four in five firms expect to increase prices in the next three months.”
She urged Sunak to use his spring budget statement, due next month, to increase investment incentives to help manufacturers.
The official annual rate of consumer price inflation rose to 5.5% in January, the highest since March 1992, while the retail prices index, which is used as the benchmark in most pay negotiations, jumped to 7.8%.
The Bank of England this month predicted that inflation will peak at about 7.25% in April, when household energy bills are due to rise by more than half.
Speaking at the National Farmers’ Union conference on Tuesday, the Bank deputy governor, Sir Dave Ramsden, predicted modest rises in borrowing costs to combat inflationary pressures buffeting the UK economy, but said the longer-term path of interest rates was difficult to predict because of uncertainties including the Russia-Ukraine conflict.
The Bank raised interest rates to 0.5% this month from 0.25%, but Ramsden was part of a minority who warned that the Bank needed to act more quickly. Along with three other members of the monetary policy committee he voted for a bigger increase to 0.75%, which would have been the first half-point rise since the bank was granted independence in 1997.
Investors are pricing in another rate hike at the next scheduled meeting of the Bank’s monetary policy committee (MPC) on 17 March.
“Some further modest tightening in monetary policy is likely to be appropriate in the coming months,” Ramsden said.
“The word ‘modest’ is significant here though – I do not envisage bank rate rising to anything like its pre-2007 level of 5% or above, let alone to the kind of levels we used to see before the MPC was formed in 1997 ,” he added.
However, the Russia-Ukraine conflict has already triggered a raft of sanctions that could increase energy prices further, including a block by the German government on Russia’s Nordstream 2 gas pipeline to Europe’s largest economy
Financial markets currently price inrates rising to nearly 2% by the end of this year – well above the levels which the Bank’s forecasts published on 3 February suggested would be needed to get inflation back to its 2% target by early 2024.
“New shocks can arise – we did not foresee the recent rise in energy prices, and as we meet today the crisis in Ukraine is intensifying – and so we should remain humble about the possibility that things might turn out differently,” Ramsden said.
“[This] makes it particularly difficult to make predictions about where monetary policy might be headed in the medium term,” he added.