Manufacturing poses rate dilemma for Bank of England

August is one of those months. Half the world might be on holiday, but the Bank of England has this habit of changing the rate of interest. This time last year it was lowered, and the year before increased. And while the majority of economists think that this time around it will stay firm, a worried minority expect a rise.

A good illustration of the problem facing the bank is manufacturing. Yesterday, the Chartered Institute of Purchasing and Supply (CIPS) released its latest figures on the UK’s beleaguered sector for producing things you can touch. In fact, of late, manufacturing has been enjoying something of a recovery, with the Office of National Statistics, CIPS and the CBI all publishing data to show the sector is improving.

The CIPS Purchasing Managers Index has a score of anything above 50, indicating the sector is expanding. It’s been above that level now for over a year. July saw a slight fall from last month’s score of 55, but at 53.8 it’s still the second highest reading (after last month’s), since November 04.

But, this morning attention has focused on the inflationary implication of the CIPS report. And there’s bad news, bad news, and when you think about it, more bad news.

First the bad news: The CIPS index for input prices, or the cost paid by manufacturers has now passed 70. When you consider a year ago, the index was just above the 50 all change mark, then a score of 70 must be truly terrifying to purchasing managers in the manufacturing sector.

Here’s the second bit of bad news. For measuring the impact of inflation, it’s not so much the prices paid by manufacturers that count, it’s their charges to their customers. A year ago, the CIPS price charges index was below 50, indicating that manufacturers were actually reducing prices. But since then it has been steadily rising, hitting the heady heights of 56.2 in July. For inflation watchers, and for those who want to see rates stay put, that’s bad news.

But here’s the really bad news. Sure, both the costs paid and prices charged are rising. But, for our poor old manufacturers, it’s getting harder. A year ago, for example, when the cost paid score was 51.5, the prices charged index was 48.1. That’s a difference of 3.4, meaning that the costs manufactures were paying were rising slightly faster than the prices they were charging, meaning margins were being squeezed  [...].

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