Manufacturing surges to record high

UK manufacturing activity surged to a record high in January, boosting the outlook for the economy and also making an early rise in UK interest rates more likely.

The monthly purchasing managers' index (PMI) for the manufacturing sector showed that activity expanded at the fastest rate in the survey's 19-year history last month. The PMI data, compiled by CIPS/Markit, showed a reading of 62 for the first month of 2011. The equivalent figure in December, now adjusted upwards, was 58.7. Any figure over 50 shows that the sector expanded.

But the data also showed inflationary pressures increasing, raising the likelihood of an increase in the Bank of England's base interest rate.

Input prices surged to the highest level in the index's history, while output prices also grew as manufacturers passed on recent large increases in commodity costs.

Further data later this week – in particular the equivalent PMI data for the services sector on Thursday – as well as possible revisions to 2010's poor fourth-quarter GDP figures at the end of February, are likely to be key considerations for the Bank's monetary policy committee when deciding whether to raise rates.

Rob Dobson, senior economist at Markit and author of the Markit/CIPS data, said: "Manufacturers are still being buffeted by rising cost pressures with raw material prices rising at the steepest pace since the survey began in 1992. Increasing signs of these costs are being passed down the supply chain in the form of higher factory gate prices, the hackles of the hawks on the Bank of England's monetary policy committee will no doubt be raised."

Last month, two members of the MPC voted to raise interest rates, but were outvoted.

Howard Archer, chief UK economist at IHS Global Insight, said: "Manufacturers have been benefiting from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound and a major rebuilding of stocks after they had been slashed during the recession.

"While manufacturers look set for a very good first quarter, the concern is that they will find life more difficult as 2011 progresses as stock rebuilding draws to a close, tighter fiscal policy weighs down on domestic demand, and problems in the eurozone threaten foreign orders."