Manufacturers’ costs are rising sharply on the back of soaring oil prices, said Government statisticians this morning.

The Office for National Statistics (ONS) said Producer Price Inflation (PPI), or the cost of manufactured products, rose by 0.2 per cent between July and August, but fell 0.4 per cent in the year to August.

The cost paid by manufacturers for raw materials rose by 2.2 per cent between July and August thanks largely to soaring oil prices, but businesses opted to keep a lid on output inflation by absorbing most of the costs themselves.

Economists said that the data suggests inflation is beginning to slowly creep back up, but that manufacturers will continue to find it difficult to pass on price rises.

Jonathan Loynes, of Capital Economics, said: “After the downward trend of the last year or so, it looks like the annual rates of input and output price inflation are on their way back up again.”

“But there is no reason to panic. There are vast amounts of spare capacity in the economy and this is another factor which we expect to bear down on core inflation over the next year or two.”

Richard McGuire, of RBC Capital Markets, said: “UK producers opted to absorb the unexpectedly sharp rise in costs in July resulting in lower margins rather than higher pipeline price pressures pointing to lower growth rather than quickening CPI inflation.

“While recent much firmer activity in the production sector would appear to raise the risk of this cost absorption proving but a temporary affair, the fading of powerful but transitory factors — notably the government's cash for clunkers programme — alongside the poor fundamental backdrop to UK domestic demand (make) it doubtful producers will enjoy any sustainable pricing power over the medium term.”

The National Institute of Economic and Social Research (NIESR) said this week that Britain has had sustained economic growth over the three months for the first time since May last year, but warned that the end of the recession could turn to a period of stagnation.

NIESR's monthly estimate of economic growth indicated that gross domestic product (GDP) grew 0.2 per cent between June and August, after a 0.3 per cent fall in the three months to the end of July.

The influential think-tank said: "This is the first time our GDP indicator has been higher over a three-month average since May of 2008 and reinforces our view that the recession ended in May of this year."

However, NIESR added: "There may well be a period of stagnation now, with output rising in some months and falling in others; the end of the recession should not be confused with a return to normal economic conditions."

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