The price of British-made goods fell at the sharpest pace in 8 years in June, putting further downward pressure on inflation.

Factory gate prices fell by a bigger-than-expected 1.2 per cent in the year to June — four times larger than the 0.3 per cent decline recorded for May and the sharpest decline since the end of 2001, as manufacturers battled dwindling demand.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Although the rate of decline in manufacturing activity has slowed substantially, increased spare capacity and still difficult conditions are maintaining pressure on firms to price competitively to gain business."

The difficulties facing manufacturers was further underlined by core producer price inflation, which strips out volatile food and energy prices, that fell sharply from 1.2 per cent in May to 0.1 per cent in June.

Manufacturers were given more room to cut costs as the cost of raw materials also declined at the fastest pace in 12 years, with an 11 per cent drop in the year to June, up from an 8.5 per cent drop in the year to May.

However, there were signs that the trend may not be sustained, as rising oil prices helped push up input costs by 1.5 per cent during June alone.

"Headline inflation could be very bumpy over the next few months as the large downward base effect from oil drops out, to be swiftly followed by a positive contribution to the annual inflation rate," said Colin Ellis, European economist at Daiwa Securities.

The Bank of England's Monetary Policy Committee will have seen today's figures before making their decision not to extend the scheme of quantitative easing yesterday. But Mr Ellis said that they would still be food for thought next month.

"Any sign that deflationary pressures are broadening out will be a cause for concern for the MPC, particularly as spare capacity will put downward pressure on prices and margins over the next 18 months or so."

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