Inflation of 5% was on the cards today after the price of goods leaving British factories soared at the fastest pace since records began.

Official figures showed so-called producer price inflation hit 10.2% last month, up from 10% the previous month and the sharpest annual increase since 1986.

Economists warned the rising price of goods manufactured in Britain posed a significant risk to the official rate of inflation as higher costs are passed on to customers.

Figures tomorrow are likely to show the Consumer Prices Index measure of inflation topped 4% in July, having hit 3.8% in June, double the 2% target.

It could reach 5% as early as September, driven by rising food prices and gas and electricity bills in the wake of recent increases by a host of energy suppliers.

Runaway inflation is preventing the Bank of England from cutting interest rates to boost the ailing economy. Fears are mounting that Britain is plunging into its first recession since the early 1990s.

The Bank publishes its quarterly Inflation Report on Wednesday and is likely to slash its economic growth forecasts at the same time as raising predictions for inflation.

The CBI today admitted the British economy is in worse shape than it expected as recently as June. “There is no doubt that the mood has darkened in the last two or three months,” said CBI director general Richard Lambert.

Paul Dales of Capital Economics said: “The monetary policy committee will remain on guard for signs that the sharp rises in pipeline price pressures seen over the last year are feeding through into inflation on the High Street for some months yet.”

However, he add that there “does seem to be some light emerging at the end of the inflation tunnel”.

While factory gate prices were rising at record highs, mainly due to increases in petrol, chemical and food-based products on the back of the high price of oil and wheat, raw materials costs fell for the first time in 10 months.
The Office for National Statistics said input prices fell 0.6% between June and July as oil eased back from record highs of near-$150 a barrel. But with raw materials still 30.1% more expensive than they were a year ago, it was a small crumb of comfort. Howard Archer of Global Insight said: “The data provide some very modest relief on the inflation front, with the rise in output prices being modestly below expectations and input prices falling.

“The Bank of England will probably be modestly relieved overall, but it is very far from out of the inflation woods yet, with consumer price inflation still likely to near 5% later this year.”

Ross Walker of Royal Bank of Scotland said: “July's monthly outturns were below City expectations and provide tentative indications of future moderation in inflation.

“The near-term inflation outlook is unambiguously unfavourable, as domestic gas and electricity hikes feed through, but there is embryonic evidence of moderating pipeline pressures.”