World Factory Input Costs Rising Sharply

Factory input costs leapt across the globe in February, the latest sign of rising inflationary pressures, while euro zone manufacturing grew at its fastest in nearly 10 years, surveys showed on Tuesday.

British manufacturing also grew strongly, at its fastest pace in nearly two decades, and Indian factory growth accelerated. But in China, where the authorities have raised rates and bank reserve requirements multiple times since last year, factory growth slipped to its slowest pace in six months.

Overall, the February purchasing managers' indexes provide the latest evidence of growing inflationary pressure from a sharp rise in commodity prices. Crude oil prices hit 2-1/2 year highs last week on supply concerns after uprisings in Libya.

"With the latest surge in commodity prices yet to fully feed through into consumer prices, inflation could well climb further in the next few months," said Martin van Vliet at ING.

The output price index in the 17-nation euro zone hit a record high for the survey, which was conducted February 11-21 before oil prices spiked again last week.

The head of the International Monetary Fund, Dominique Strauss-Kahn, warned on Monday that global economic growth could suffer if the rise in oil prices, now well above $100 a barrel, were sustained for a long period.

Official euro zone data also showed consumer prices rose 2.4% year-on-year last month, considerably above the European Central Bank's target of just below 2%.

The European Commission upped its inflation forecasts for the bloc, now expecting prices to rise 2.2% this year compared to their previous 1.8% forecast.

The ECB is not expected to exit from the ultra-loose monetary policy it adopted in the depths of the financial crisis when it meets on Thursday but economists expect an interest rate hike by the fourth quarter of this year.

"February's flash euro zone CPI figures will do little to alter the ECB's recent rather more hawkish stance ahead of Thursday's Council meeting and press conference," said Jonathan Loynes, chief European economist at Capital Economics.

The latest European PMIs also showed that manufacturing growth across the euro zone, which had previously been mainly driven by Germany's robust economic recovery, picked up in some economies on the periphery. In debt-stricken Ireland, manufacturing activity hit an 11-year high.

A comparable survey for the U.S. from the Institute for Supply Management, due at 1500 GMT, is expected to show a slight rise to 61.0 from 60.8, indicating a strong rate of growth.

But Federal Reserve Chairman Ben Bernanke is expected to say in Congressional testimony later on Tuesday that the recent rise in oil prices poses a risk to economic recovery.


China PMIs showed that manufacturing growth slipped to its slowest pace in at least six months, a sign that the government's campaign to tame inflation was biting.

But gauges of factory input prices still hit three-month highs in both China's official PMI and a private-sector PMI sponsored by HSBC.

Many of China's businesses were shut or running at half speed in the first part of February as China celebrated the Lunar New Year holiday, making it difficult to draw too many firm conclusions though the PMIs are on a mild downward trend.

Since October, when inflation began to pick up, China has raised banks' required reserves five times to a record high, increased interest rates three times, and also ordered banks to lend less.Lending by Chinese banks remains excessively fast, topping the "extreme upper limit" set by regulators, the country's banking chief said at an internal meeting at the start of this year, a source told Reuters on Tuesday.

Raw material costs have risen broadly with oil. Worries abound that a sustained rise in commodity prices, from metals to grains, could reduce demand and so slow economic activity around the world.

India has the highest inflation of any major Asian economy even after seven rate rises in a year. Factory input prices there rose at the fastest pace since the records for the PMI began in 2005.

"Manufacturers are facing ever steeper increases in input costs, reflecting the tightness of labor markets and rising material costs, which will continue to add upward pressure on output prices," said Leif Eskesen, chief economist for India and ASEAN at HSBC, which sponsors the index.