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Goods producers suffer marked input cost inflation in December
as supply chains lengthen
Pre-Brexit stockpiling adds to demand pressure
Companies respond with sharp increase in factory gate prices
The UK manufacturing sector saw an increase in price pressures
at the end of 2020, coinciding with a marked tightening in local
and global supply chains and a temporary pre-Brexit surge in
demand. As a result, the IHS Markit/CIPS Manufacturing PMI
indicated the fastest the rise in input prices for two-and-a-half
years.
With global suppliers facing difficulties transporting input
goods in the fourth quarter, freight prices have notably soared,
leading manufacturers to raise factory gate charges in an effort to
protect margins. The increase in factory prices means UK consumer
prices could start to rise in early-2021.
Input prices rise as supply worsens
In line with a global trend of sharper cost inflation, the UK
Manufacturing PMI Input Prices Index indicated the steepest rise in
input costs since June 2018 in December. Surveyed businesses
attributed this to a host of factors, including raw material
shortages, higher logistics costs and increased demand for
inputs.
Shortages of raw materials and logistical issues were reflected
in a steep lengthening of suppliers' delivery times in December.
Barring those seen in April and May 2020, during the first wave of
the coronavirus disease 2019 (COVID-19) pandemic, the latest
deterioration in supplier performance was the steepest observed in
the PMI's 29-year series history.
Companies often reported that goods transported from abroad took
considerably longer to arrive, in part due to a lack of shipping
containers after freight travel was disrupted by the pandemic in
the first half of 2020, notably from China. Consequently, shipping
costs have soared, with some reports suggesting a fourfold rise in
freight rates from November.
With shipping capacity at a premium, input cost inflation was
noticeably quicker among firms requiring bulkier items. In fact,
makers of intermediate and investment goods saw the sharpest rises
in input prices since the first half of 2018. Consumer goods firms
meanwhile saw a slower but still marked uptick.
In addition to problems at the point of origin, manufacturers
reported a slowdown at the domestic end of the supply chain during
December, as Brexit stockpiling, COVID-19 measures and off-sick
staff meant that UK ports often had to cope with high volumes but
lower than usual workforces. Cargo thus took longer to unload,
while dock workers also had to deal with large volumes of empty
containers that had piled up during the global lockdown.
As a result, our survey panel showed that around 13% of
companies experienced congestion at domestic ports, up from 6% in
the previous month.
Brexit deadline adds temporary surge in
demand
While the UK faced supply constraints from the pandemic, there
was also additional input demand pressure in December as more
companies stockpiled ahead of the Brexit deadline. The latest
survey indicated that roughly 22% of manufacturers increased their
inventories due to Brexit, the highest since March 2019.
Moreover, firms saw a marked rise in new export orders from
European clients, with approximately 16% of the survey panel citing
an increase due to the expected change in trade rules from January.
As such, the additional demand for outbound transport meant that
local supply chains faced strong traffic in both directions, thus
compounding the impact on logistics costs.
Since the new trade deal has come into effect, reports suggest
that ports and borders have seen an easing of traffic, although
some hauliers have noted delays away from ports as they accustom to
new regulations.
Factory gate charges rise more quickly
UK manufacturers responded to the sharp rise in input costs in
December by raising output prices at the quickest rate since
February 2019. Moreover, January data could reveal another strong
increase in factory gate charges, as some firms tend to see a lag
between cost pressures and pricing decisions.
As a result, consumers are likely to face higher prices in the
first quarter of 2021, particularly as many companies will look to
protect their margins after a devastating year for revenues in
2020. The new national lockdown could meanwhile hamper supply
chains and drive up material costs further, although a softening in
post-Brexit demand should help to ease inflationary pressures, as
will low prices for many consumer-oriented services.
Flash UK PMI figures released on Friday 22nd January will
provide the first signal for UK inflation in the new year.
Posted 18 January 2021 by David Owen, Economist, Economic Indices, 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.
