Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

U.S. PMI Signals Further Inflationary Pressures Lie Ahead

Published 09/02/2018, 07:19
Updated 05/03/2021, 15:50
  • Manufacturing and service sector firms report improved pricing power amid stronger demand
  • Cost pressures remain elevated, fuelling uptick in output prices
  • Building inflationary pressures could challenge Federal Reserve’s policy path

US economic data over the coming few months will have a strong bearing on market expectations towards the Federal Reserve’s path for monetary policy. Although the advanced estimate of fourth quarter GDP growth came in weaker than the third quarter, in line with the IHS Markit PMI, the latest data point to both stronger domestic demand and inflationary pressures.

An end to the ‘Goldilocks’ economy?

The recent ‘Goldilocks’ scenario of solid economic expansion and stable inflation has contributed to improved global optimism in recent months. This has been particularly apparent in the US and eurozone. Alongside moderate inflation, US GDP expanded at 2.3% in 2017, the economy’s best year since 2014, while strong PMI data for the eurozone suggests fourth quarter GDP growth of 0.6%, rounding off the best year since 2010, is likely to be revised even higher to 0.8%.

Although 2017 fourth quarter US GDP growth was weaker than that of the third quarter, domestic demand growth accelerated and January PMI data indicate that demand pressures in both manufacturing and service sectors are above their respective long-run averages.

PMI indicates strong and accelerated demand growth

PMI Indicates Strong And Accelerated Demand Growth

Meanwhile, PMI data point to increasingly elevated cost pressures. The US manufacturing PMI Input Prices Index registered 58.5 in January to signal a sharp pace of inflation, broadly in line with the strong annual growth observed in the official purchasing prices index.

The combination of strong demand and rising costs is encouraging firms to raise output prices, which could spur inflation higher. In fact, with deteriorating supplier delivery times and rising input costs, overall price pressures look set to build even further. As evidenced by the chart, greater costs in tandem with supply chain pressures usually feed through to consumer prices.

Production costs inflate sharply

Production Costs Inflate Sharply

Supply-side pressures intensify

Supply-side Pressures Intensify

To that end, mounting price pressures and robust demand questions how much further economic growth can continue before inflation begins to edge into unwanted territory for monetary policymakers.

Market response

The fear of rising inflation has resonated through global markets in the past week. Yields on US Treasuries have been driven higher, while equity markets have experienced widespread declines. However, according to IHS Markit Manufacturing PMI data, the recent uptick in US 10-Year Treasury yields is a fair reflection of economic fundamentals.

PMI supports higher bond yields

PMI Supports Higher Bond Yields

The policy path ahead

Overall, strong demand coupled with intensified cost pressures was observed across both surveyed sectors, according to January PMI data. The median member of the Federal Reserve Open Market Committee expects 3 rate hikes in 2018. If demand and supply-side pressures are to mount further, questions will be raised as to whether the Fed should seek an even quicker rate of policy normalisation to prevent the US economy from overheating.

Disclaimer: The intellectual property rights to these data provided herein are owned by or licensed to Markit Economics Limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit’s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information (“data”) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon.

In no event shall Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers' Index™ and PMI™ are either registered trademarks of Markit Economics Limited or licensed to Markit Economics Limited. Markit is a registered trade mark of Markit Group Limited.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.