* Annual PPI output price fall sharpest since Nov 2001
* Annual PPI input price fall sharpest since Sept 1986
* PPI data suggest consumer price inflation will ease
By Fiona Shaikh and David Milliken
LONDON, Aug 7 (Reuters) - British factory gate prices fell at the sharpest rate in almost eight years in July and input prices dropped at the fastest pace since 1986, suggesting headline consumer price inflation is set to fall sharply.
Friday's figures come after the Bank of England decided to pump an extra 50 billion pounds into the financial system to shore up the economy, and they reinforce policymakers' view that weak activity will dampen inflation for some time to come.
The Office for National Statistics said producer output prices fell 1.3 percent on the year in July, the lowest annual rate since November 2001, albeit above forecasts for a 1.6 percent drop.
Input prices fell by a bigger-than-expected 12.2 percent on the year, the largest decrease since September 1986.
The declines were mainly due to sharply lower oil prices, with the cost of crude oil down 41.0 percent on the year -- the sharpest drop in almost 8 years.
The decline will have been largely due to base effects after oil prices hit a record high last summer and its impact will subside as oil prices have been creeping up again recently.
But analysts noted that weak demand was likely to prevent manufacturers from putting up prices and that consumer price inflation would remain subdued.
"Coupled with the effects of the enormous amount of spare capacity in the economy, this suggests that underlying consumer price inflation is set to fall considerably over the coming year or two," said Jonathan Loynes, economist at Capital Economics.
PRICE PRESSURES EASING
Policymakers said the decision to raise their quantitative easing programme to 175 billion pounds was based on a concern that a widening degree of slack in the economy would bear down on inflation, which they must keep at 2 percent.
Consumer price inflation fell to 1.8 percent in June and the central bank's new forecasts for inflation and growth next Wednesday will probably show it continuing to fall.
Barring the petroleum and other products categories, there were annual rises in all other output price components in July and there were also monthly gains in most areas, including oil.
Excluding oil and food, output prices rose 0.2 percent on the year -- the lowest rate since June 2004 but confounding expectations for a 0.4 percent fall. And core output prices were 0.5 percent up on the month.
But analysts said that did not alter the picture of subdued price developments going forward.
"It looks like a bit of a natural correction on the output price side," said Ross Walker, economist at RBS. "Obviously, we are still in deflationary territory there so there is no immediate inflationary problem." (Editing by Ron Askew)