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U.K. factories raised prices at the fastest annual pace since 1991 in January as gains in raw material costs reached a record, limiting the Bank of England's scope to reduce borrowing costs.

Producer prices for goods including chemicals, textiles and food rose 5.7 percent from a year earlier, the Office for National Statistics said in London today. The cost of raw materials increased an annual 19.1 percent, the most since records began in 1986.

“This is shocking,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. “It feeds concerns about inflation, and will make the Bank of England cautious about lowering interest rates too rapidly.''

The pound rose as investors pared bets on further rate cuts after one last week to cushion the economy from slowing growth. Policy makers are balancing that risk against the inflation threat as factories charge more to offset record oil prices and higher food costs.

The weaker pound helped narrow the balance of trade in goods in December. The deficit shrank to 7.6 billion pounds ($14.8 billion) from 7.9 billion pounds in November as exports fell less than imports, the statistics office said in a separate report today. The trade gap for 2007 still reached 87 billion pounds, the most since records began in 1697.

Pound Gains

The U.K. currency climbed as much as 0.5 percent against the dollar after the report and traded at $1.9458 as of 3:03 p.m. in London. Investors pared speculation on the extent of rate cuts this year beyond the central bank's quarter-point reduction in the benchmark to 5.25 percent on Feb. 7.

Manufacturing output prices rose 1 percent from December, the most since January 1995, the statistics office said. Economists predicted 0.4 percent, the median of 27 forecasts in a Bloomberg News survey showed. They had predicted a 5.1 percent annual increase.

Rolls-Royce Group Plc, Europe's biggest maker of aircraft engines, said last month it will eliminate as many as 2,300 jobs to help counter the effects of higher raw-materials costs. RPC Group Plc, a maker of plastic bottles for products such as Nivea sun cream, said on Feb. 1 that rising costs wiped out the benefit of increased sales in its fiscal third quarter.

`Extremely Difficult'

“We've raised prices about 20 percent over the past five years and that is basically the increase in polymer costs,'' Chris Sworn, head of the blow-molding business at RPC, said in an interview today quick payday loans. “It's extremely difficult to pass the extra costs onto your customers.''

Noble Francis, economics director at the Construction Products Association, said in an interview that his group's members are encountering higher steel and concrete prices because of energy cost increases. They include Wolseley Plc, the world's biggest distributor of plumbing and heating equipment.

“Unless there is an offsetting squeeze on margins, gains in import prices will add to upward pressure on inflation in coming quarters,'' said Michael Saunders, chief western European economist at Citigroup Inc. in London. “The data will reinforce the worry that inflation and pricing expectations in general across the U.K. are no longer firmly anchored.''

Producer-price gains were led on the month by manufactured items, gasoline, food and chemical products, the statistics office said. The annual food-price increase of 8.5 percent was the highest since records began in 1986.

Raw Materials

Companies are charging customers more after costs of raw materials rose. They increased 2.6 percent on the month, the statistics office said. Crude oil reached a record $100.09 per barrel on Jan. 3, and traded at $91.34 today.

“Higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months,'' the central bank said Feb. 7 in a statement with the interest-rate decision. Still, slower economic growth “is in prospect,'' which poses “downside risks to the outlook for inflation.''

Economists estimate that the January inflation rate rose to 2.3 percent, exceeding the Bank of England's 2 percent target for a fourth month, a survey showed. The statistics office will report that data tomorrow.

A decline in the U.K. currency is adding to pressure on inflation and raw-material prices by driving up import costs. The pound has fallen about 10 percent in the past year on an index compiled by the central bank showing its performance against a trade-weighted basket of currencies.

The central bank predicts that the U.K. economy will probably grow around 2 percent this year, close to the lowest rate since 1992, after expansion of 3.1 percent in 2007. Policy makers will update those forecasts on Feb. 13, when Governor Mervyn King holds a press conference.

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