Video: Gary Duncan on last week's interest rate decision

Surging fuel and food costs sent the price of goods leaving factories soaring last month at the fastest annual pace for 16 years, raising fears that persistent inflationary pressures will thwart steep interest rate cuts to bolster a vulnerable economy.

Much worse than expected official figures yesterday showed that prices at factory gates leapt by 0.5 per cent in December, lifting their annual rate of increase to 11.2 per cent - the highest since August 1991, when Britain was stuck in the depths of the last recession.

The bleak news sparked new warnings from City economists that entrenched price pressures threaten to hamper the Bank of England’s ability to underpin conditions with aggressive rate cuts, even as growth falters.

City fears that the Bank’s Monetary Policy Committee may be left hamstrung by inflation were reinforced as the data also showed faster than expected gains in raw material and energy prices for manufacturers last month that are yet to feed through.

Cost pressures for factories are being stoked by sharp falls in the pound, as these drive up bills for imported materials and fuel.

Sterling’s losses gathered pace as it sank to a new record low yesterday against the euro, which hit a new high of 76.08p. The euro’s gains were boosted by renewed dollar weakness, with the greenback’s latest losses helping to push gold prices to record levels above $900 an ounce, at $914.

Economists said that while the MPC was still poised to cut rates next month, after disappointing hopes for a move last week, simmering price pressures could handicap any attempts to take aggressive action. Ross Walker, of RBS, said: “This does serve to highlight the inflationary consequences of a weaker currency, and is likely to constrain the pace and extent of rate cuts.”

Analysts said that the Bank would be particularly worried that not only were cost pressures for industry intense, but that manufacturers were succeeding in passing these down the pipeline to the high street by charging higher prices for their goods.

The jump in the cost of goods leaving factories last month was driven almost wholly by food and fuel prices. Prices for manufactured food products leapt by 7.4 per cent year on year, the biggest rise since records began in 1992, while petrol product prices rose by 20.5 per cent year on year, the strongest increase since March 2000.

Upward pressure on food prices was underlined as the cost of home-produced food materials rose by 28 per cent year on year last month, a record rate fuelled by soaring wheat prices.

In another headache for the Bank, “core” inflation for finished products other than food and fuel also hit a nine-month high of 2.6 per cent.

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