To most consumers, news about the prices of goods at Britain’s factory gates might seem like a remote concern. Yet the grim reality behind the record rises in the costs of British-made products is that the road from the factory gate to a painful impact on our everyday lives is very short.

The news about the soaring inflationary pressures across British manufacturing could hardly be worse. It can only spell yet more steep price increases at the shops, and in the already surging cost of living. It scuppers the chances of interest rate cuts to ease costs for borrowers and prop up the faltering economy, and instead increases the threat of rate rises. And it adds to an already severe squeeze on manufacturers as well as retailers, heightening the danger of job cuts.

The huge scale of the increases in what British manufacturers must pay for fuel and materials for their products makes it inevitable that they will be forced to raise sharply what they charge. In turn that makes still more price increases on the high street inescapable.

The figures are startling. Manufacturers’ costs are up by a third in the past 18 months, a bigger rise than over the whole of the previous two decades. With retailers demanding competitive prices when they buy British, the price of goods is rising far less rapidly, by 8.9 per cent over the past year, yet this is still a record.

Not all of these price rises for goods will, in turn, be passed on to consumers at the shops. With Britons already feeling a painful pinch on their pocket from surging utility and food bills, retailers are being forced to keep prices competitive to tempt shoppers to keep spending. Yet the supermarkets and high-street chains face steep rises in the costs of stock bought from abroad, as well. A 10 per cent plunge in the pound in 12 months is driving up import bills. So the combined effect makes dearer prices for many goods at the shops unavoidable.

Which goods will go up most? That depends on how intense the competition on the high street is for each kind of product, and how prices move for stock bought from Britain and from abroad. With house prices slumping, demand for furniture, carpets, homeware and “big ticket” electrical products is tumbling as fewer people move. So competition among these retailers is brutal, and prices may be capped.

The bad news is that prices are charging upwards most rapidly for food and fuel, which we have no choice but to buy, and where competition is inevitably less.

Worse still, the bleak figures will only add to the Bank of England’s angst that inflation is digging itself into the economy and will have to be rooted out, whatever the cost. So interest rate cuts this year look all but ruled out.

It is clear, too, that the Bank will start to debate whether rates may now have to rise. But it will be wary of risking a rise, for fear of turning a sharp downturn into a recession. With the signs increasing that the economy is running out of steam, the Bank will more likely count on that to quell inflation, and will keep interest rates pegged.

In the meantime, the double whammy of stalled spending by struggling households alongside rising costs for every kind of business means that companies’ sales and profits are going to be under growing strain. That will spell cutbacks and lay-offs. This raises the spectre that the economy could slide into a vicious downward spiral.

From the factory gate then, a lorryload of bad news is heading in the direction of all our doorsteps.

Explore Economics

• Pre-Budget Report 2009

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• World Economic Forum

• The Times MPC

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