The Bank of England’s headache over severe price pressures worsened yesterday as a record surge in the cost of goods leaving factories reinforced expectations that headline inflation would hit 5 per cent over the summer.

Official figures confirmed that prices for UK-manufactured products last month rose by 10.2 per cent from a year earlier, marking their fastest annual pace of increase since 1986.

The news came ahead of consumer prices figures today that are tipped to show that headline inflation soared to more than 4 per cent last month, reaching a rate at least twice the Bank’s 2 per cent target.

In the wake of that, the Bank is expected to take a hardline stance in its quarterly Inflation Report tomorrow, making clear that inflationary pressures leave it no scope to cut interest rates in the near-term, despite mounting fears of recession.

Anxieties over a severe economic downturn are set to intensify today as two key surveys show housing market activity at its weakest in four decades, and a continuing slump in high street trading.

In its new forecasts tomorrow, the Bank is set to raise sharply its projection of the likely peak in inflation while drastically downgrading its view of Britain’s likely growth performance this year and next.

The intensity of the dilemma confronting the Bank’s Monetary Policy Committee was emphasised by yesterday’s producer prices figures.

As well as a record headline rate of increase in the overall cost of manufactured goods, the data showed that “core” output prices, for goods other than food and fuel as well as alcohol and tobacco, were also climbing at an annual pace of 6.6 per cent – the fastest since 1981.

However, there was some hope of eventual respite from relentless increases in inflation as recent steep falls in oil prices, by about $30 a barrel from last month’s record highs, fed through last month into an easing of the cost pressures afflicting manufacturers.

Factory input costs, for raw materials, components and fuel dropped last month by 0.6 per cent – the sharpest monthly fall for 18 months.

A further drop in the cost of crude boosted City hopes that a continued retreat in oil prices over coming months would eventually allow headline inflation to recede and pave the way for the Bank to cut interest rates by the end of this year, or early next.

In New York yesterday, benchmark US light crude fell another $0.75 to close at $114.45 – its lowest close since May 1 – after briefly dropping below $113 a barrel. Benchmark North Sea Brent crude dropped by $2.00 a barrel to $111.33, taking its slide in the past month to more than 18 per cent.

“While the Monetary Policy Committee will still be on guard for some months yet for signs that the rises in pipeline prices [for goods leaving factories] are feeding through into the high street, there is at last some light at the end of the tunnel,” Paul Dales, of Capital Economics, said. However, expectations that the Bank will remain on inflation alert for now were reinforced as revisions to industry’s costs in previous months showed that those had risen more sharply than initially reported.

The revisions meant that last month’s annual rate of increase in manufacturers’ input costs fell back yesterday by less than the City had expected. Year-on-year, costs remained up by 30.1 per cent during July – only a fraction lower than the 30.8 per cent annual pace registered in June.

The Bank’s inflation problem is being compounded by a 12 per cent plunge in sterling over the past year, which is driving up Britain’s import bills. That difficulty was also underlined yesterday by official trade figures that showed import price inflation jumped during June to a record annual rate of 15.6 per cent, up from 14.5 per cent in May.

Even after excluding oil as well as so-called erratic items, such as precious stones, the cost of imports in June was 8.9 per cent higher than a year earlier, the fastest increase since 1993. Prices for imported food have risen by a quarter over the past year.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive