Manufacturers' costs rise to squeeze margins

Manufacturers are facing a "nasty" squeeze on margins after figures today showed a higher-than-expected leap in input prices.

The Office for National Statistics said input costs for manufacturers spiked to 9% year-on-year last month, up from 8.2% in October, while the month-on-month increase was 0.9%.

November's rise was more than expected with the numbers "certainly nasty", according to IHS Global Insight economist Howard Archer.

Output price growth, which was revealed last week, slowed to 3.9% year-on-year in November from 4% in October confirming that input costs were rising faster than output.

Archer said: "This will maintain pressure on manufacturing companies to try and raise their output prices further in the near term.

"While companies have been able to pass on some of their higher input costs due to the decent bounce back in manufacturing activity in 2010, they have nevertheless had to absorb a fair proportion of the increase in costs."

Input prices were pushed higher by rising crude oil and fuel costs, while imported food materials also lifted, although this was partially offset by a fall in home-produced food.

Experts said the pressure was unlikely to ease any time soon, as oil prices have surged from 85 US dollars to 90 dollars a barrel in recent weeks.

Manufacturers may try to pass on more of their costs, but could be hampered if the recovery slows as expected over the year ahead.

"Manufacturers will find it increasingly difficult to raise their prices, given likely slower expansion and significant excess capacity. The Bank of England will certainly be hoping that this is the case," said Archer.

The Bank is fighting against stubbornly high inflation, at 3.2% in October, and has forecast a further spike this winter before it eases back.

Figures tomorrow are expected to show little respite in November, with most economists pencilling in inflation to hold at 3.2%.