Optimism among UK manufacturers hit a two-year high in July, despite a pick-up in inflation expectations to levels not seen in four-and-a-half years, a survey showed.

According to a study from the KPMG, over 60 per cent of UK manufacturers expect output, new orders and business revenues to be higher over the next 12 months than at present.

They expect the launch of new products and further expansion in export markets to contribute to the improvement.

An increased proportion of manufacturers expected to take on additional staff over the course of the next year.

Thirty per cent of firms expect to expand their workforce, compared with 20 per cent predicting contraction.

The resulting net balance of +9.8 per cent was the first positive reading for employment in one-and-a-half years.

The July survey was also positive on investment intentions, with optimism regarding capital expenditure picking up to a four-and-a-half year high and confidence regarding R&D spending remaining solid.

At the same time prices were also expected to surge.

Expectations for input price inflation soared in July to the highest in the four-and-a-half-year survey history.

Fifty-seven per cent of manufacturers expect to see the annual rate of inflation for raw materials to accelerate over the next twelve months.

Factory gate prices are also seen roaring ahead, with 42 per cent of manufacturers expecting inflation of output prices to accelerate.

John Guy, a Birmingham-based partner with KPMG and a manufacturing special-ist, said: "Optimism amongst manufacturers hit a two-year high in July and this, taken together with other positive findings, suggests they are a lot more upbeat than the doom-mongers and recent data from the office of National Statistics would have us believe.

"Confidence in growth of output, new orders and business revenues have all picked up since the start of the year, and it is particularly encouraging that employment expectations have turned positive for the first time in one-and-a-half years.

"On inflation, expectations for input prices picked up to the highest in four-and-a-half years but forecasts for output price inflation steadied, highlighting the difficulties faced by the Bank of England's Monetary Policy Committee in assessing the extent of the pass through of higher commodity prices to the wider economy."