Weak pound boosts UK manufacturing but import costs rise steeply

Higher inflation predicted as new PMI survey suggests firms are now passing extra import costs on to consumers with price hikes at fastest rate for five years

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Expansion in British factories slowed a little in October as the weak pound boosted exports but also pushed the prices of imports sharply higher.

In the latest sign that consumers in the UK will face higher prices following the sharp fall in the value of the pound since the Brexit vote, manufacturers raised the price of their goods at the fastest rate in more than five years.

The latest Markit/CIPS manufacturing PMI survey suggested that firms are starting to pass on higher import costs as the weak pound makes raw materials such as oil more expensive.

However, the weak exchange rate also helped to boost orders from the US, the EU and China.

The broader survey suggested the sector got off to a decent start in the fourth quarter. The headline index combining output, orders, and employment fell to 54.3 in October, from 55.5 in September, where anything above 50 signals expansion.

Rob Dobson, senior economist at IHS Markit, and an author of the report, said the manufacturing sector should return to growth in the fourth quarter, after shrinking by 1% in the third.

He added: “On the positive side, the boost to competitiveness [from the weak pound] drove new export order inflows higher, providing a key support to output volumes. The downside of the weaker currency is becoming increasingly evident, however, with increased import prices leading to one of the steepest rises in purchasing costs in the near 25-year survey history.

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“Inflationary pressure was also experienced at the factory gate, with average selling prices rising at the steepest pace since mid-2011.”

Capital Economics warned that the data suggests consumer prices will “pick up sharply” in the next few months.

Sharp rise in Markit/CIPS manufacturing input prices balance in October suggests CPI inflation set to pick up sharply over next few quarters pic.twitter.com/RimvHrEmpT

— Capital Economics (@CapEconUK) November 1, 2016

The UK economy has shown more resilience than expected since the EU referendum on 23 June. Official figures published last week showed the economy grew by 0.5% in the third quarter between July and September. It was slower than the 0.7% growth in the second quarter, but stronger than economists expected and ruled out the possibility of a recession in the second half of 2016.

A stronger-than-expected performance has fuelled expectations that the Bank of England’s monetary policy committee (MPC) will refrain from cutting interest rates on Thursday, instead holding them at a record low of 0.25%.

Howard Archer, chief European and UK economist at IHS Markit, said: “The decent October manufacturing purchasing survey reinforces belief that the Bank of England will be sitting tight on monetary policy on Thursday after the November MPC meeting.”