British factory gate inflation slowed to its weakest rate in 4 months in October, easing concerns about rising price pressures and fanning expectations of another Bank of England interest rate cut.
The Office for National Statistics said on Monday output prices fell 0.1 percent last month, bringing the annual rate of increase down to a much slower-than-expected 2.6 percent from 3.3 percent in September.
Economists said the data would help calm BoE policymakers' fears over headline consumer price inflation, which is forecast to be above the central bank's 2.0 percent target for the fourth month running when October figures come out this week.
"October's UK producer prices figures have brought the strongest signal yet that pipeline price pressures have finally started to ease," said Jonathan Loynes at Capital Economics.
"(This is) encouraging evidence that price pressures in the goods production process are finally easing, boding well for further falls in core consumer price inflation over the coming months."
Interest rate futures rallied after the data as dealers, who had begun pricing in a rate hike on recent inflationary concerns, renewed fading expectations the BoE could cut interest rates in 2006.
That echoes a slim majority of economists who still see more easing on top of August's quarter percentage point trim to 4.5 percent.
The fall in output prices was driven by a large decline in scrap steel prices following a drop in demand, the ONS said. Huge demand from fast growing economies such as China has helped boost the price of scrap steel and October's fall followed strong rises the months before.
Food prices also fell at their sharpest rate in almost 6 years with one firm blaming lower poultry prices on the threat of avian flu.
Core output prices, which exclude food, drink, tobacco and petroleum products, fell 0.3 percent in October, the biggest decline since July 1999.
"The marked easing back in core producer output inflation should temper concern within the Monetary Policy Committee that underlying inflationary pressures are building up as a result of persistently high oil prices," said Howard Archer, economist at Global Insight.
Although factory gate prices eased, raw materials costs rose unexpectedly in October by 0.3 percent following a fall the month before.
Input price inflation was also stronger than expected on an annual basis but at 7.5 percent was its slowest since last December. The easing was helped by a sharp slowdown in annual crude oil inflation to 22.1 percent from 43.5 percent.