An unexpected fall last month in the prices paid by manufacturers for materials has boosted hopes that inflationary pressures might be easing in a way that reduces the likelihood of further rises in interest rates.
The Office for National Statistics reported that input prices fell 0.5% on the month on a seasonally-adjusted basis, as falling metal prices offset fresh increases in the cost of crude oil.
With the prices of imported equipment also dropping in a month when the pound was strong, the reading was the weakest since January and confounded analysts' forecasts for a 0.7% gain.
On an annualised basis, annual input price inflation fell sharply to 0.1%, from 2.3% in June, against expectations for a 1.3% rise.
The ONS data suggest that manufacturers may have taken advantage of easier conditions on the input pricing front to continue to widen margins, which came under great pressure last year when the cost of fuel and commodities surged.
Output, or factory gate, prices rose 0.2% on the month in July for an annual rate of 2.4%, compared with June's upwardly revised 0.3% gain on the month and 2.5% annual rise. The rate was broadly in line with analysts' forecasts and down only slightly on June's upwardly revised 0.3% gain on the month and 2.5% annual rise.
However, economists focused on the fall in input prices, which they said might serve to allay fears at the Bank of England that continuing increases in costs paid by manufacturers could be fuelling an inflationary spiral.
"The numbers provide marginal evidence that the inflationary background may not be as malignant as some on the Monetary Policy Committee may fear," said David Page, an economist at Investec.
Experts will study data on consumer price inflation, retail sales and wages this week for further signs that inflationary pressures might be easing sufficiently to persuade policymakers to postpone any further rise in borrowing costs.
"We still expect interest rates to reach 6% this autumn, but we feel there is a growing probability that such a move may be delayed until November," said Howard Archer, an economist at Global Insight.
"The current turmoil in global credit and financial markets also boosts the case for unchanged monetary policy for now," added Archer, who said the producer price data were relatively reassuring.
However, the ONS data conflicted with survey evidence on input prices from the Chartered Institute of Purchasing and Supply/NTC purchasing managers' index for July, published earlier this month. This showed that input price inflation rose at its fastest rate in almost a year, while average factory gate prices rose at the fastest rate since the series began in January 1992.
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