MANUFACTURERS benefited from improved margins in December after figures showed that factory prices rose at their fastest pace in eight years.

The Office of National Statistics (ONS) said its core output price index improved 0.3 per cent between November and December - the best rise since September 1995.

At the same time, the ONS said input prices faced by the manufacturing industry were 0.2 per cent lower on a seasonally adjusted basis. That took the annual rate of increase from 4.2 per cent in November to 1.9 per cent in December.

HSBC economist John Butler said: "There is some evidence that manufacturers are using lower costs - unit labour costs as well as input prices - to boost margins."

However, he believed the figures were unlikely to herald the start of an "inflation charge", with the improvement in output prices reflecting the weak trading environment faced by firms during the past few years.

Mr Butler said: "Excess capacity, intense competition and an appreciation in sterling against the dollar should keep manufacturing costs low.

"2004 should be a better environment for UK manufacturing than 2001, 2002 or 2003, but we expect an industrial recovery is likely to prove only modest and gradual."

The month-on-month improvement in output prices was helped by a 7.7 per cent rise in scrap metal prices and a rise of 1.2 per cent in furniture prices.

On input, the ONS said rises in fuel, crude oil and home produced food prices had been offset by price falls in imported parts and equipment, including electrical components and office machinery and computer prices.