The price of British-made goods fell at the sharpest pace since 2001 in June as manufacturers endured dwindling demand. Factory gate prices fell by 1.2 per cent in the year to June — four times larger than the 0.3 per cent decline recorded for May, suggesting that inflation is set to tumble further. Analysts had expected a fall of 0.8 per cent.

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 downward trend in pricing was further highlighted as core producer price inflation, which strips out volatile food and energy prices, fell sharply from 1.2 per cent in May to 0.1 per cent in June, the lowest level in five years.

Manufacturers were given more room to cut costs as the price 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. While this was weaker than the 12.2 per cent drop expected by analysts, it was the biggest decline since April 1997.

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.

Amit Kara, an economist at UBS, said: “My sense is that given the increase in crude oil prices, input prices will climb again. Output prices will stay under pressure in the immediate future because of the economic slowdown.”

The CPI measure of inflation, which stands at 2.2 per cent, is widely expected to fall well below the Bank of England’s 2 per cent target, settling close to zero, as the economy struggles to emerge from the recession.

The alternative RPI measure of inflation, which includes housing costs, is already in negative territory and is expected to have fallen further in June to -1.6 per cent from -1.1 per cent when new figures are published on Tuesday.

The Bank has already cut rates to a record low of 0.5 per cent and embarked on a scheme of quantitative easing to inject £125 billion into the economy. However, the Bank’s rate-setting committee surprised analysts this week by not extending the scheme by a further £25 billion.

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