British industry's promising revival this summer has suddenly lost much of its impetus, while makers of consumer goods appear more determined than ever to drive up their prices in the coming months in an effort to restore their margins.
The findings in the CBI's latest quarterly Industrial Trends Survey contrast sharply with the picture of a robust economy – with manufacturing taking its full share – and official figures showing manufacturing driving Britain's economic growth over the first nine months of this year.
The CBI's chief economic adviser, Ian McCafferty, said the loss of momentum had been very recent, over the last two to six weeks.
"The unexpectedly strong recovery in manufacturing over the first half of the year has not been sustained and it looks as if we are entering a period of slightly more modest growth," he said.
"The slowdown in the US has clearly dampened export orders and domestic demand remains fragile."
He warned that the Bank of England is likely to be influenced by a survey finding that it is now mainly consumer goods companies that are planning price increases, which will feed straight through to the measures of inflation faced by private individuals. This will come at a time when the deflationary impact of ever-cheaper imports is falling away.
"It is an issue of timing," Mr McCafferty said. "Consumer price indices are sure to be affected."
The CBI is sticking by its forecast that official interest rates will rise to five per cent by the end of this year. "But the quarter-point should be easily sufficient," he added. Other economists have raised the prospect of a second increase next spring.
The 20 per cent fall in the price of crude oil since August has so far done nothing to check the rise in industry's costs, the survey shows. Manufacturers saying their average unit costs have risen outnumbered those with lower costs by 24 per cent of the sample, the highest balance since April last year.
Mr McCafferty pointed out that prices for other commodities, most notably metals, have gone on rising, while many manufacturers are still buying oil products – and gas – at prices agreed in earlier contracts
"Although oil prices have dropped from their high of the summer, the knock-on benefit of cheaper input costs for manufacturers has yet to feed through, and firms still find it difficult to raise selling prices in response to increased costs," he added.
"But pressures to increase prices remain in the system, particularly in the consumer goods section."
The recent slowdown in demand – coupled with abundant stocks of finished goods – is reflected in the weakest expectations for future output since January.
That in turn will lead to more job losses. The CBI sees another 26,000 manufacturing jobs going in the final quarter of this year, probably reducing Britain's entire industrial workforce to three million early next year.
Manufacturers telling the survey they intend to cut jobs outnumbered those expecting to recruit by 21 per cent, the weakest showing since October, 2003.
Howard Archer, chief UK economist at Global Insight, described the survey as very disappointing with "a worrying mix of weakening manufacturing activity and rising price pressures".
He added: "The weakening of order books, coupled with the recently higher price balances suggests that rising prices is stifling demand.
"This was also evident in the latest retail sales data for September."
This cemented the case for a quarter-point interest rate increase next month – but the markedly weaker overall tone of the survey reduced that for a second rise next year.
And higher borrowing was virtually confirmed when Bank of England chief economist Charles Bean said policymakers should not take any chances with inflation picking up as it could encourage people to think the rise would be sustained.
The pound shot up nearly a third of a cent as Mr Bean's speech made investors even more confident the BoE would raise interest rates next month.