08S7C's Economics Blog

UK producer inflation at record

Manufacturers face rising costs
UK factory gate prices and producers' costs rose at a record pace in April, official figures showed.
The Office for National Statistics said that output prices for sales of manufactured products rose at a rate of 7.5% in the year to April.
Input prices rose 23.3% over the year. Input and output prices are at their highest since records began in 1986.
The data is likely to underscore policymakers' concerns about rising inflation as the economy slows.
Higher food and fuel prices accounted for the rise in input and output prices, along with increases in alcohol and tobacco duties following government tax changes.
The data came as the CBI said that small and medium-sized firms were struggling with high energy and raw material prices.
Retail pressure
The figures show that manufacturers are managing to pass on higher input costs to their customers, says the BBC's economics editor Stephanie Flanders.
However, she adds, the key question for the Bank of England is whether retailers will be able to pass them on to the final consumer - and so far, they have not been able to do so.
Analysts at Capital Economics said the higher cost of goods would not necessarily be passed on to consumers.
"We think that the consumer slowdown will mean that retailers will be forced to absorb the bulk of these cost increases in their margins," said Paul Dales, UK Economist at Capital Economics.
Consumer price index data for April is due to be released on Tuesday.
But Mr Dales added that the cost pressures could make the Bank of England's Monetary Policy Committee (MPC) more cautious on cutting interest rates.
"These data will maintain the MPC's reluctance to cut interest rates any faster."

comments:
In this article, the concepts of government intervention and tax incidence are prevalent. Government intervention is evident from 'government tax changes' which resulted in increase in alcohol and tobacco duties. Price mechanism does fail - instances involving demerit goods like liquor and tobacco. Hence government will intervene and the form in this article is via indirect taxes on goods. It is perceived by suppliers to add to cost of production and hence shift supply curve upwards. To produce the original quantity, they have to fully recoup their tax paid as well, hence they will raise equilibrium price(output prices for sales of manufactured products rost at a rate of 7.5%) and reduce quantity exchanged.
Consumer slowdown will be due to hike in output prices, hence products will be price elastic ie more than proportionate change in demand wrt change in price. Price elasticity of demand will therefore account for greater incidence of taxation on producers(retailers will be forced to absorb the bulk of these cost increases in their margins). Producers will not wish to lose too many customers due to over-increase in price, such that total revenue decreases. Perhaps the nature of manufactured products in the essay is addictive and has many substitutes.
We also need to consider the aim of the government in implementing these taxes. Possibilities are to increase tax revenue/restrict production.

Hui Pei

posted by pea @ 8:32 AM