Price Trends in UK Manufacturing Industry Point to Further Profit Squeeze

Since late 2002, the prices manufacturers in the UK pay for the raw materials of their products have generally been rising faster than the prices they receive for their finished products. In July, the year to year increase in input prices was 2.79% while the increase in output prices was 1.38%.. Although labor is, in general, much the largest cost of production and is not included in the input index, the relationship between prices of final goods and the prices of raw material prices is often a good indicator of profit trends. In the UK, corporate profits are defined as the gross operating surplus of corporations in the national accounts. According to this measure, profits in the first quarter of this year have decelerated to 7.4% from an increase of 9.9% in the fourth quarter of 2002. The trend in output and input prices since then, suggests a further squeeze on profits in the UK.