Companies are raising the prices of their goods to try to counter the strongest cost increases since 1990, driven by more expensive energy and raw materials.
The latest quarterly CBI Industrial Trends Survey found that these cost pressures are intensifying even as orders and output are showing signs of easing in a sector that has so far proven resilient to recent economic shocks.
Despite the turmoil in the banking world caused by the credit crunch, the proportion of firms reporting concerns about credit or finance as a likely constraint on output or orders has not increased significantly in the past three months. However, the percentage worried about political and economic conditions abroad as a constraint to export orders has risen to 21 per cent.
Ian McCafferty, CBI chief economic adviser, said: 'Fears of slowing demand alongside rising prices have become a reality in the manufacturing sector over the past quarter, as it readjusts to a weaker economic outlook.
'Manufacturers are being forced to pass on higher costs to customers by increasing prices, and are no longer able to absorb continuous cost increases into their profit margins.
'The Bank of England now faces particularly difficult decisions on the timing of any further interest rate cuts as it must weigh up these strong inflationary pressures against the needs of a slowing economy.'