• Markit/CIPS manufacturing index rose to 58.3 in December
• High prices stoke inflation fears

Britain’s manufacturing sector ended 2010 on a surprisingly high note, with activity soaring to a 16-year high.

The closely watched monthly survey from Markit/CIPS (Chartered Institute of Purchasing and Supply) showed the manufacturing index rising to 58.3 in December from 57.5 in November, far ahead of economists’ forecasts.

This is the highest level since September 1994. The new orders measure was the highest since May while export orders climbed to the highest since April.

“Today’s PMI (purchasing managers’ index) signal a happy new year for UK manufacturing with activity surging ahead through to the end of 2010. Ongoing demand in both home and export markets, along with the continued strength of eurozone PMIs, should put the UK recovery on solid ground as we enter 2011,” said Lee Hopley, chief economist of the EEF manufacturers’ organisation.

The data helped to drive shares higher in London, with the FTSE 100 gaining 141 points to 6041 by midday – its highest level since June 2008.

The survey also showed that raw material and other costs surged at the fastest rate since the series began in 1992. The input prices measure leapt to 81.2 from 73. Companies are managing to pass some of this on to their customers, with the output prices index at 58.6.

This pick-up in pricing pressures could worry the Bank of England’s monetary policy committee. It is charged with keeping annual inflation at 2%, but has warned that it could soon hit 4%.

Alan Clarke, UK economist at BNP Paribas, described the headline number as “an impressive performance and sets the tone for a robust contribution to fourth-quarter GDP. However, the elevated level of the input price index also highlights a major issue for the year ahead – elevated inflation and whether or not this will trigger an early BoE interest rate hike.”

However, the picture in the rest of the economy is less rosy. Vicky Redwood, senior UK economist at Capital Economics, noted: “While the manufacturing recovery may continue to pick up steam, the outlook for the rest of the economy this year does not look too promising. This is the year that the fiscal squeeze gets properly under way, consumers face their first drop in real disposable incomes since 1981 and problems in the eurozone threaten to undermine the UK’s trade prospects.”

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club. pointed out that manufacturing only accounts for 9% of the UK economy.

“Respondents reported another increase in manufacturing employment in December which is good news for a sector where employment levels have been persistently falling for several decades … But manufacturing job creation alone is not going be able to offset the likely decline in public sector employment,” Goodwin warned.

America’s manufacturing sector also performed better than expected last month. Data released yesterday showed that it grew for the 17th month in a row, driven by faster growth in new orders and production.

Business: Manufacturing sector | guardian.co.uk