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Producer prices rise sharply

Producer prices increased by 0.7% between August and September a figure which was almost double that expected by economists, increasing the annual rate of producer price inflation from 8.7% in August to 9.5% in September. This is the largest single rise since April 2010 and is starting to cause concerns within economic and government circles. So what does this mean?

In simple terms the producer prices index is the rate at which raw material prices increase before goods and services can be sold to consumers. When you consider that output price inflation actually fell between August and September, from 4.7% per annum to 4.4%, it is easy to see why businesses are becoming concerned. If the cost of producing goods continues to increase while the selling cost of goods is unable to keep up with this rate of raw material price increases then businesses will be under more and more pressure.

As profit margins continue to struggle it is inevitable that not only will some businesses go under but even the most successful businesses will have to reduce their head counts. This will then put more pressure on the UK economy, the welfare state and ultimately could push the UK towards a double-dip recession. Those who believe we are well and truly out of the woods may well need to think again.

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