Prices charged by British manufacturers unexpectedly fell in August at the fastest rate in 22 years after the price of oil retreated and scrap metal costs declined.

Today's upbeat figures raise the prospect that the Bank of England's Monetary Policy Committee (MPC) will cut interest rates by the end of the year, as pressure on inflation, currently at a 16-year high of 4.4 per cent, may ease on falling manufacturing prices.

The 0.6 per cent drop in the output price index is the largest fall since records began in 1986, and pushed the annual increase in producer output prices down to 9.7 per cent compared with a 10.3 per cent rise in July.

Paul Dales at Capital Economics said: "This will go some way to convincing the MPC that the greatest threat to the UK is from weakening demand and not rising inflation."

Howard Archer, chief UK and European economist at Global Insight, said: "The figures reincorce our belief that interest rates will be cut from 5 per cent to 4.75 per cent in November."

The figures were published after the US Government stepped in to take control of giant US mortgage lenders Freddie Mac and Fannie May, boosting confidence in the housing market and banks as the chances of more losses from the US sub-prime crisis receded.

Evidence also emerged today that the fall in prices in August was not just related to cheaper oil. Core producer output prices, which exclude volatile food and energy products, fell by 0.1 per cent last month — the first decline in nearly three years.

However, Mr Archer said that while falling input prices eased the pressure on manufacturers, falling demand could lead to further job losses. He said: "The year-on-year rise in input prices fell back to 26.2 per cent from a peak of 30.5 per cent in June. This eases the pressure on manufacturers' margins, although they remain tightly squeezed, which will weigh on investment and employment, in tandem with weakening demand."

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