U.K. Inflation Data Pressure BOE

U.K. factory gate prices climbed at their fastest annual rate since the early nineties in the first month of 2008, as the cost of gas and food soared, data from the Office for National Statistics released recently shows. The producer prices numbers also indicated what economists described as an "alarming" buildup in pipeline inflation pressures, with Jan. input prices climbing to their highest level since the series began in the mid '80s. The results pose a headache for the Bank of England's Monetary Policy Committee, which cut the Bank rate to 5.25% from 5.5% last week, but signaled that rapid price gains will prevent it from easing policy rapidly in months ahead. An economist at Bank of America said producers are no longer taking this rapid run up in costs sitting down. Last month, they aggressively increased their selling prices. He said while they think the deteriorating economic environment will provide a brake on inflationary pressures over time, the BOE may feel increasingly constrained in the near-term. The pound gained against the euro and the dollar following the data, while short sterling contracts slid as investors trimmed back their expectations of rate cuts by the BOE. Investors will be closely watching MPC's quarterly Inflation Report for further clues on the speed and timing of future rate moves. The report will contain the Committee's latest forecasts, which are likely to show a deterioration in the near-term outlook for both output growth and inflation. The output price index for home sales and manufactured products lifted 5.7% on the year in Jan. after a 5.0% gain in Dec. Last month's rise was the fastest since July 1991, and easily beat economists' average forecasts for a 5.1% gain. The extent of the rise was mostly due to sharp gains in the other manufactured goods category, that includes gas, chemicals and food, the ONS said. Within that, gas prices soared 23% on the year, while food prices climbed 8.5%. In monthly terms, the output PPI rose 1.0% in Jan., sharply up from Dec.'s downwardly revised 0.4% gain, and much higher than economists' expectations for a 0.5% increase. The gain was also the highest since January 1995. Excluding volatile food, beverages, tobacco and petroleum prices, output producer prices rose 1.1% on the month and 3.1% on the year. The annual figure marked the sharpest rise since Jan. 1996. In Dec., core output PPI rose 0.3% on the month and 2.5% on the year. The input price index for materials and fuels purchased by the manufacturing industry rose 2.6% on the month and 18.9% on the year in seasonally adjusted terms, ONS said. Both results were much higher than forecast by economists polled by Dow Jones, who tipped on average that the input PPI would rise 1.2% from Dec. and 14.6% in annual terms. In the last month of 2007, input PPI lifted 1.4% on the month and 12.7% on the year in seasonally adjusted terms. UK