Hopes of further cuts in interest rates from the Bank of England were dampened yesterday after factory-gate inflation leapt to a 16-year high.

The 0.5 per cent rise in output prices in November took inflation on the producer price index (PPI), an early indicator of price pressures, to 4.5 per cent, the highest level since August 1991. The Office for National Statistics (ONS) said that the increase had been driven by soaring food and energy prices. The prices that food producers charge retailers rose by 6.6 per cent over the year, the strongest such figure since June 1993, in large part because of the soaring cost of domestically produced potatoes after a weak harvest.

Energy prices also climbed, spurred by a 9.8 per cent increase in the oil price over the month. The annual rise in petrol products’ cost hit 18.5 per cent, the strongest for more than seven years.

The data highlighted the conundrum facing the Bank’s Monetary Policy Committee, which last week cut rates by a quarter-point. While financial markets have been in turmoil since August, posing a risk to growth, producer price inflation has climbed steadily for several months, adding weight to calls for caution by the MPC’s hawks. The Bank has given warning repeatedly of the risk to price stability from manufacturers passing on higher costs to customers.

Ross Walker, of Royal Bank of Scotland, said: “Factory-gate inflation soaring to its highest level for over a decade and a half is a significant concern. It corroborates the evidence of price pressures in the survey data and should help to prevent more aggressive policy easing in the near-term.”

The ONS figures showed that input prices rose by 1.7 per cent in November and were up by 10.2 per cent year-on-year, the highest pace of inflation faced by manufacturers since July 2006. Input prices rose in almost every sector, the figures showed, with crude oil prices contributing the most to the increase.

In a more encouraging indicator for the Bank, output prices apart from food and energy were subdued. Core output price inflation, which excludes food, drink, tobacco and petrol, softened to 2.2 per cent in November from 2.3 per cent the month before.

Some economists expressed hopes that the need to keep consumers shopping over the festive season would limit any attempt by suppliers to make higher prices stick.

Alan Clarke, of BNP Paribas, said: “In the run-up to Christmas and with the consumer increasingly under pressure, we would expect to see signs of discounting at the underlying level.”

Further signs of the dangers from inflation came yesterday from the Department for Communities and Local Government (CLG), which reported an increase in house price inflation in October to 11.3 per cent, compared with 10.8 per cent the previous month.

However, over the month prices were flat, the weakest monthly reading since February. In addition, most surveys of price at exchange are showing a marked fall in prices, whereas the Government’s figures are for completion prices and thus are a lagging indicator of the state of the market.

Seema Shah, of Capital Economics, said: “With the housing market outlook darkening, it is simply a matter of time before the CLG house price data also show evidence that the housing market correction is under way.”

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