Will Raw Material Costs Strangle the Recovery?

Could “input” inflation squeeze growth? Manufacturers’ raw material costs leapt up by 2.6 per cent in October, the Office for National Statistics reported 6th November.

The increase in input prices was larger than analysts expected and is the biggest since June 2008. It appears driven by rising oil costs and the decline of the pound, making the cost of importing raw materials more expensive. Producer prices actually fell by 0.2 per cent in September, after rising by 2.0 per cent in August so gross profit margins are well and truly being squeezed.

Over the year to October, manufacturing input prices increased by 0.1 per cent, after a 6.2 per cent decline in the year to September so these latest figures may highlight a pivotal trend change.

Stephen Whitlam, Head of the UK Banking Team for Expense Reduction Analysts said: ” Manufacturers now face crucial decisions. If they increase prices to pass on rising input costs they may price themselves out of business. Absorbing the costs will narrow margins. A focus on reducing indirect business costs can produce tangible and sustained improvements to both profitability and that oh so important cashflow. Indeed even costs often described as ‘direct’ such as warehousing and distribution can be tackled to significant benefit.”