* Input price inflation at 7-yr low
* Output price inflation at 5-yr low
* Data bodes well for consumer price inflation
By Fiona Shaikh and Christina Fincher
LONDON, May 8 (Reuters) - British factory gate inflation slipped to a 5-year low last month, while companies' raw materials costs fell at their fastest annual rate in 7 years, suggesting inflation remains on a downward track.
The Office for National Statistics said annual producer output price inflation eased to 1.2 percent in April from 2.0 percent in March. That was the lowest since April 2004 but above analysts' forecasts.
Input prices fell by an annual 5.0 percent, the biggest drop since July 2002 and a larger decline than analysts were expecting.
The slowdown in annual producer price inflation was mainly due to oil prices, which have plunged by around two-thirds from their peak last summer.
That bodes well for consumer price inflation, which has been above the Bank of England's 2 percent target for almost 1-1/2 years even as the economy as dived into recession.
"The figures offer some welcome reassurance that, despite the recent slow downward progress of CPI inflation, much weaker cost pressures are set to feed through to the high street over the coming quarters," said Jonathan Loynes of Capital Economics.
The central bank expects consumer inflation to fall below its target this year as the economic downturn wears on and has slashed borrowing costs and started pumping money into the system to kick-start growth and ward off deflation.
On Thursday it announced a 50 billion pound top-up to its programme of asset purchases, taking its fund up to 125 billion.
But there was little market reaction to Friday's figures as investors awaited the BoE's quarterly inflation and growth forecasts next week for more steer on where monetary policy is heading.
PIPELINE PRESSURES EASING
Analysts said it was reassuring that input price inflation eased despite the recent weakness of the pound.
Sterling has steadied over the last two months, although it has lost more than a quarter of its value against other major currencies since mid-2007. This exacerbated the impact of rising oil and commodity prices last year.
"That (fall) is encouraging because the sharp fall in sterling since the autumn does pose an upside inflation risk," said Ross Walker of RBS.
The ONS said the trend in input price inflation was consistent with the pound's exchange rate, although there was no evidence of any direct effect this month.
It also said increases in duty on petrol, alcohol and tobacco announced by finance minister Alistair Darling in the Budget last month, if passed on in full, will have added 0.2 percent to the output prices index in April, and a further 0.1 percent in May.
Excluding the volatile components of tobacco, food and alcohol, annual factory gate slowed less than expected in April to 2.4 percent from 3.2 percent in March, although that was still the weakest rate since Dec. 2007.
Economists said factory gate inflation was likely to keep falling as companies battled against weak demand.
"We suspect that many manufacturers will cut their prices over the coming months given increased spare capacity and the need to be competitive in a still depressed environment," said Howard Archer, economist at IHS Global Insight.