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Our Materials Price Index (MPI) increased 0.5% last week,
building on a 1.3% increase from the week before. Price movement
was mixed with five of the ten MPI sub-components down last week.
Commodity prices as measured by the MPI are up 86% compared to the
same week in 2020, still a strong rate of increase but a slower
rate of escalation than seen two months ago. More important, MPI is
about 2% below its recent peak in early May.
The largest gains in the MPI were seen in chemical and pulp. The
MPI's chemicals sub-component was the larger driver pushing the
overall index higher last week, posting a 5.5% gain. This increase
marks an acceleration following the previous week's 3.6% gain.
Global ethylene prices were once again the main reason for the
recent strength in chemicals, recording an average increase of
13.7% across regions last week. Ethylene price increases are
concentrated in North America due to unplanned outages in the US
Gulf Coast. Pulp prices rose 3.5% last week, following average
weekly increases of 1.2% in the two weeks prior. This recent
strength marks a change from the softness in pulp markets in late
May and June and is tied to firming market conditions in mainland
China. On the downward side, rubber prices fell 1.6% last week.
Rubber prices began declining seven weeks ago with recent weakness
linked to a pullback in production by Chinese tire manufacturers.
Lumber prices fell 22%, the largest drop since mid-May. Prices have
reverted to November 2020 levels, driven by production catching up
and buyers standing on the sidelines waiting for even lower prices.
It is worth noting that certain steel finished prices, especially
in North America, bear a resemblance to lumber in having reached
record levels well above previous peaks. They are also likely to
see a similarly rapid unwinding once the market breaks.
Data released this past week underscores a shift in consumption
behavior that may reduce inflation in commodity prices. The United
States Census Bureau released its monthly retail sales report and
noted declining sales for segments specializing in household and
recreational goods. At the same time, sales at food services and
drinking places rose. As goods-based pandemic consumption makes way
for service-oriented spending, pressure in durable goods markets
and, in turn, upstream in commodity markets, will ease, a change
the MPI is now beginning to hint at. The flip side to this
improving picture of inflation in goods markets is the service
sector. In the US rising airport traffic and hotel revenue nearing
pre-pandemic levels are changes we expect to see replicated in
other advanced economies as vaccinations become more widespread and
containment measures are relaxed. As we saw in the manufacturing
sector last year, however, service industries are likely to find it
just as difficult to match supply with quick changes in demand with
a corresponding rise in service cost inflation. There is also a
general downside inflation risk in the outlook should second wave
COVID-19 cases surge prior to achieving widespread global
vaccination rates.
Posted 21 July 2021 by Tal Dickstein, Senior Economist, Pricing and Purchasing
