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Global price pressures intensified in April, according to the
latest PMI data compiled for JPMorgan by S&P Global. The PMI
survey data, based on panels of over 30,000 companies in 45
countries, showed near-record upward pressure on firms' costs amid
supply chain disruptions and energy price hikes resulting from the
Ukraine war and China's lockdowns. However, at the same time,
global economic growth has slowed amid a marked weakening of demand
growth, presenting some downside risks to raw material price
inflation in coming months but also underscoring the risks to
economic growth from tighter monetary policy.
Record selling price inflation rates
April's PMI surveys saw new records set for selling price
inflation in the US, eurozone, UK and Brazil. A near-record rate
was reported in Japan and the strongest rise since 2013 seen in
India. China, in contrast, saw average prices lowered for the first
time since May 2020, but this largely reflected subdued demand amid
new lockdown measures.
The aggregated global PMI index of selling prices inflation
across goods and services consequently hit a level far exceeding
anything previously recorded since the surveys began collecting
selling price data in 2009.
The global PMI's index of input costs, which has a longer time
series history than the selling price index, also rose further in
April. This gauge showed average input costs across manufacturing
and services rising globally at a rate not witnessed since the
commodity price shock of 2008, and a rate rarely exceeded since
data were first available in 1998.
The clear implication of this further acceleration in growth of
firms' costs in April is one of global consumer price inflation
likely accelerating further in the coming months.
Of particular note was the extent to which service sector price
inflation, which has generally lagged that of goods during the
pandemic, has now almost matched that of goods. This in part
reflects the recent surge in demand for services as economies
around the world loosen COVID-19 restrictions.
Sources of inflationary pressures
The survey responses highlight three main sources of
inflationary pressures.
First, raw material prices continued to rise at an increased
rate in April as pandemic supply disruptions were exacerbated by
Russia's invasion of Ukraine and new lockdowns in China. The number
of companies reporting higher raw material prices as a factor
behind rising costs hit a new all-time high, running over three
times the long run average.
Second, soaring energy prices due to the Ukraine war meant the
number of firms reporting costs to have risen on the back of higher
energy bills exceeded that seen even in 2008, running at an
unprecedented level of over six times the long-run average.
Third, difficulties finding staff and rising costs associated
with existing employees pushed wage pressures higher. Although down
from recent highs, recent months have seen the strongest upward
pressure on firms' costs from wages seen since these data were
available in 2005.
Supply chain delays rise, but demand
weakens
The extent to which prices have been driven up by supply chain
delays and shortages is illustrated by the suppliers' delivery
times index from the PMI. Globally, supplier lead times have
lengthened to unprecedented degrees during the pandemic, with 2021
seeing new records being broken month after month in terms of
supplier delays. While the opening months of 2022 saw some
moderation in the number of reported delays, March and April have
seen the supply situation worsen again, linked primarily to the
disruptions caused by the Ukraine war and China's lockdowns. The
latter is perhaps of the more notable concern for the near-term:
China's PMI data have shown a more severe downturn in manufacturing
output due to the recent Omicron outbreaks than seen in the initial
COVID-19 shutdowns.
The supply crisis therefore continues to act as a major support
to prices, especially for goods. Russian sanctions amid the Ukraine
war meanwhile continue to act as a support to global energy
prices.
However, while surging demand for goods helped drive prices
higher early in the pandemic, this boost is now fading. Measured
globally, new orders for manufactured goods barely rose in April,
representing the weakest demand picture since the downturn of the
second quarter of 2020. Even if China is excluded, demand growth
has weakened on this measure markedly in recent months.
Thus, while the supply side is still driving prices higher,
demand has faded to an unusual degree in this supply environment,
suggesting goods prices could be prone to weakening in coming
months.
Service sector inflation dependent on pent-up demand and
cost of living
While service sector demand and output has shown more resilience
than manufacturing in recent months, even here the rate of
expansion has slowed (even excluding China).
This stronger pace of service sector growth relative to
manufacturing is being supported by pent up demand following the
removal of pandemic restrictions, but by definition this demand
rebound will moderate in coming months. The sustainability of this
upturn - and hence service sector companies' pricing power - will
therefore inevitably depend to a large extent on the degree to
which consumer spending power is eroded by the rising cost of
living - notable for essentials such as energy and food - as well
as by the monetary policy response. Central banks are feeling the
pressures to take more aggressive action to rein-in rising
inflationary expectations via higher interest rates, which are
designed to cool demand.
Central banks will be data dependent amid price and
output divergences
However, the policy tightening process is by no means riskless
or without cost. Looking at historical comparisons underscores the
extent to which the renewed surge in price pressures in recent
months at a time of slowing economic activity is unusual. The last
time that a divergence on this scale was seen was just prior to the
global financial crisis. It would clearly not take much to push the
global PMI output index below the 50 mark from its current reading
of 51.0, highlighting the rising recession risk associated with
tighter monetary policy. Hence many policymakers are therefore
stressing that rate hikes are data dependent, and in that respect
the PMI numbers for the coming months are likely to provide
critical inflation on the developing inflation, demand and supply
trends.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
At the same time, business costs increased at historically elevated rates, with new record levels of cost inflation… https://t.co/ofDaBfq7KX
May 25
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