The Bank of England is expected to go ahead with an interest rate cut next month despite factory gate inflation reaching a 16-year high during December, fuelled by rising oil and food prices.

Factory gate inflation, which includes prices for manufacturing materials, fuel, food, beverages and tobacco, rose by 0.5 per cent to 5 per cent in December, according to the Office for National Statistics (ONS), marking the highest level of inflation since August 1991.

Analysts had been expecting output costs to increase to 4.6 per cent, up from 4.5 per cent in November.

While fuel and food prices have risen strongly, pushing total output costs up 11.3 per cent for the 12 months to December 2007, non-core factory gate inflation, which includes raw materials only, rose by 0.6 per cent in the last month of the year – the highest increase in six months.

Despite the overall increase in factory gate inflation, the Bank of England is widely expected to reduce the interest rate by a quarter point to 5.25 per cent next month after maintaining the UK borrowing cost at 5.5 per cent last week.

Howard Archer, chief UK and European economist at Global Insight, said: “The December producer price inflation data were pretty nasty, and probably contributed to the Bank of England's reluctance to cut interest rates for a second month running at its January MPC meeting.”

However, Mr Archer is among a number of economists who expect a rate cut next month.

Today’s figures from the ONS begin a week of statistics that will be instrumental in the Bank’s interest rate decision in February, including Consumer Price Index (CPI) inflation data for December, house price information from the Royal Institution of Chartered Surveyors and figures on retail sales.

In the US, there is speculation the Federal Reserve will cut interest rates by as much as half a point to 3.75 per cent as figures expected this week are forecast to reveal poor retail sales for December.

Ben Bernanke, the Fed’s chairman, signalled last week that he would be prepared to make further cuts to borrowing costs, to “take substantive additional action as needed to support growth and to provide adequate insurance against downside risks”.

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