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Supply issues in UK manufacturing push up prices

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Lorries queue for the frontier control area at the Port of Dover in Kent, where freight Channel traffic is returning to normal levels following a quiet start to the year and the end of the transition period with the European Union on December 31. Picture date: Friday January 22, 2021.
Supply chains seized up as a result of COVID lockdowns and Brexit, slowing manufacturing for August. Photo: PA

Supply issues in the UK manufacturing sector linked to COVID-19 lockdowns and the knock-on effects of Brexit led to "rapid price inflation" and rising input costs, according to Markit's PMI reading for August. 

UK manufacturers continued to face rising constraints caused by supply chain issues. Shortages of inputs and delivery delays disrupted production schedules, leading to slower output growth, and also resulted in marked increases in input prices, the survey found. 

Companies nonetheless still achieved solid gains in output, new orders and employment.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to a five-month low of 60.3, a tick below July's 60.4 but above the long-run average of 51.9. The PMI has signalled an improvement in operating performance in each of the past 15 months.

"Rates of increase in both input costs and selling prices remained close to record highs in August, as rising demand chased constrained supply and companies moved to pass on price increases to clients and consumers alike. This is affecting most markets, but especially autos, metals, food stuffs and electronics," said Rob Dobson, director at IHS Markit. 

Average purchase prices rose at the fourth-fastest rate in the survey's history, beaten only by the cost increases seen during May, June and July. A wide range of items were reported as up in price, as shortages and delivery issues left rising demand chasing reduced supply.

Manufacturing output rose again in August, albeit to the weakest extent since February. Growth eased particularly sharply at intermediate goods producers. Companies linked higher output to new order gains and the ongoing process of re-opening global economies.

Read more: Average UK house price heads towards £250k

Incoming new business rose in August, reflecting increased inflows from both domestic and overseas markets. On the export front, manufacturers reported increased orders from clients in Europe, China, the US, Asia and South America.

The outlook for the UK manufacturing sector also remained bright in August. Almost 66% of companies indicated that they expect output to rise over the coming year, compared to only 4% forecasting a decline. 

Confidence rose to a three-month high, reflecting expectations of continued economic revival, stronger global demand, investment plans and hopes that current supply issues would either lessen or even be fully resolved.

"Manufacturers still are hiking prices rapidly, though the decline in the output price index to 71.6 in August, from 73.1 in July, tentatively suggests that the biggest month-to-month increases now have been seen," said Samuel Tombs, chief UK economist at Pantheon Economics. 

"Note, however, that prices for imported consumer goods have flatlined this year, thanks to sterling’s appreciation, and some retailers will absorb higher prices for domestically-produced goods. 

"Consumer demand for goods also likely will weaken next year, as people gradually rebalance towards purchasing services, unleashing some renewed deflationary pressure."

Watch: What is inflation and why is it important?

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