Prices charged by British factories fell for the second month in a row in September, signalling that inflation may soon start to ease.

Producer prices fell by 0.3 per cent last month, official figures show, pushing the annual increase in prices to 8.5 per cent, down from 9.1 per cent. However, the monthly fall was slightly less than the 0.4 per cent decline economists had predicted.

The drop in the price of oil helped curb growth, but core producer output prices, which exclude volatile oil, food and tobacco prices, also fell by 0.1 per cent during the month after falling 0.5 per cent in August.

Howard Archer, chief UK and European economist at Global Inisight, said: "This indicates that markedly weaker manufacturing activity and demand is now increasingly diluting companies' pricing power."

Inflation soared to a 16-year high of 4.7 per cent in August, and the Bank of England has warned that it is set to increase even further. Figures out tomorrow are forecast to show that inflation increased to 5 per cent in September.

But the Bank said that once inflation peaks, it will fall back sharply. Economists say that this should leave the way open for more rate cuts, after the Bank's emergency half point rate cut last week.

"We expect interest rates to be cut by at least another 50 basis points before the end of the year, very possibly as part of further coordinated central bank action. We currently forecast interest rates to fall to 3% on 2009, but they could well come down further still," Mr Archer said.

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