Manufacturers were given a boost yesterday when a survey showed production increased at its fastest rate for almost two years in June.
The Chartered Institute of Purchasing and Supply said output grew at its quickest since July 2004 as demand at home and abroad strengthened.
The survey also showed that manufacturers took on more staff in June to deal with the heavy workloads.
But they were hit by the sharpest rise in raw material costs for one and a half years, with the price of metals such as aluminium and steel soaring.
Chemicals, energy, paper, plastics and timber were also more expensive than they were in May and the increases led to higher costs for customers.
Roy Ayliffe, director of professional practice at CIPS, said: "The recovery of UK manufacturing was unremitting this month amidst reports from purchasing managers in the sector of robust growth in production and new business.
"Employment increased too for only the second time in nearly a year and a half as a result of rising workloads.
"Manufacturers continued to battle to protect margins against soaring input price inflation, however, as the cost of metals, chemicals and energy rose significantly.
"This followed a report last week that rising commodity prices have now overtaken fraud as the top concern of financiers globally."
Prices at the factory gate also rose as firms tried to cover their costs.
The CIPS barometer for measuring manufacturing output rose to 55.1 in June - its highest reading since July 2004. The figure was better than economists' expectations of 53.2 and ensured the index stayed above the 50 mark for the 11th successive month. Any reading above 50 indicates growth in the sector.
The index for new orders hit its highest level for two years, with demand in the UK and overseas expanding. Manufacturers benefited from stronger conditions in the eurozone, with demand in Germany, France, Italy and Spain particularly strong.
HSBC economist John Butler said: "The manufacturing sector, which for some time appeared to have missed out on the global industrial recovery, now seems well and truly at the party."
The CIPS data corroborated a survey by the Confederation of British Industry last month which showed manufacturers were at their most upbeat in a year and is likely to reinforce expectations that the next move in borrowing costs will be up.
"The data is by no means pivotal to the Bank of England Monetary Policy Committee's thinking on rates but does add to a growing sense that economic activity is in fine fettle," said RBS group chief economist Andrew McLaughlin. The Bank holds its next policy meeting on Thursday, but all 47 economists polled by Reuters predict it will leave interest rates at 4.5 per cent.
"We fully expect rates to stay on hold this time around but there does appear to be some pressure on the MPC to look at the case for higher rates over the next couple of months," said Philip Shaw, chief economist at Investec.
Interest rates look set to remain on hold until the end of this year despite rising inflation, according to accountants BDO Stoy Hayward. Kim Rayment, partner at BDO in Birmingham, said: "There has been widespread speculation about whether interest rates will increase in July to combat rising inflation.
"But we predict that the MPC will adopt a 'wait and see' approach, not just this month, but for the rest of 2006.
"This will allow the committee to assess the full impact of recent fluctuations in the world financial markets on the UK economy and monitor any future falls in the value of the dollar. This is obviously reassuring news for the Birmingham business community." ..SUPL: