UK Manufacturing: Record growth raises inflation concerns

2nd February 2011

UK manufacturing grew by a record amount in January (Guardian) according the Purchasing Managers' Index (PMI).

The monthly PMI showed that activity expanded at the fastest rate in the survey's 19-year history in January. The PMI data, compiled by analysts CIPS/Markit, showed a reading of 62 up from 58.7. The paper reports that any figure over 50 shows that the sector expanded.

There are fears that this can only lead to upward pressure on inflation and increase the likelihood of interest rate rises.

Eurozone manufacturers also had a good January growing at a record pace according to sister index, the Markit Eurozone Manufacturing Purchasing Managers' Index, reported here on Reuters.

Eurozone PMI, which records manufacturing activity across all the major euro area economies, rose to 57.3 in January from 57.1 in December.

Ireland and Italy had particularly strong showings despite their political turmoil but there was bad news for Greece which continued to lag.

However Markit also notes that Eurozone input prices also rose at the highest rate since the survey began in 1997.

For the UK, commenter Underflow from the Guardian is baffled by recent conflicting signals.

He writes: "Strange things are happening [Rings and Things, Rubble 3]. No but they are. Depressed domestic demand, low pound and low interest rates, inflation feeding through and a rise in manufacturing activity."

"Interest rates will have to rise soon which on the one hand will pile on more misery for consumers and increased costs for companies but may well induce more lending from the banks. Yet because profits will be squeezed, investment will also be subdued and bank lending may not increase by as much as some want. Interesting and a mite depressing article here. The Millibank boys will be crowing of course."

Underflow links to Menzie Chinn who rounds ups some detailed economic views on blogsite econbrowser which suggests some economists are very suspicious of the Q4 fall in output.

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