- The eurozone PMIs for May flagged an acceleration in economic activity and surging pipeline price pressure in the manufacturing sector. The composite PMI rose to 56.9 from 53.8 – the fastest pace of expansion in more than three years. At face value, today’s figure is consistent with annualized GDP growth of around 3%. The services sector, which is benefiting from a faster vaccine rollout and the gradual lifting of restrictions, was the main driver of the acceleration. The manufacturing PMI remained roughly flat at 62.8, just below its record-high level hit last month. Our Chart of the Week shows the unprecedented increases in input and output price indexes amid a record lengthening in suppliers’ delivery times.
- The red line indicates that supply chain strains are intensifying to unprecedented levels. The index for suppliers’ delivery times continued to decline (on a reversed scale in the chart), hitting a historic low in the survey’s 23-year history. Not even at the time of the Great Lockdown, when a large part of the global economy was shutdown, did this index hit such lows. At that time, longer delivery times were entirely explained by supply issues, while today activity congestion is caused by a combination of strong demand, supply shortages of some raw materials and other inputs (including labour), and supply chain bottlenecks that are preventing manufacturers from smoothly processing new orders that are coming in at fast pace.
- Demand-supply imbalances are fueling pipeline price pressure. The input prices index hit another historic high as factories compete for increasingly scarce inputs. Firms are also progressively passing on higher production costs; the output prices index (which correlates tightly with PPI inflation) rose strongly again and hit another record high. The extent of the pass-through to CPI remains very uncertain, but the fact that most of the pipeline pressure is materializing in the energy and intermediate good sectors seem to indicate that the overall spillover to consumer inflation will not be large. In any case, the ECB has already signaled that it regards the current price shocks as temporary, and rightly so, although, supply shortages could persist for longer than originally anticipated. Therefore, the central bank will be willing to look through it so long as measures of inflation expectations remain well anchored, which seems likely.
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