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After a year of strong commodity price increases, inflation pressures are now building downstream in supply chains. The IHS Markit Materials Price Index (MPI) has more than doubled since March of 2020, with commodity prices collectively now at their highest level since early 2014. We can point to several factors to explain the rise: strong mainland Chinese demand, a shift in consumer consumption toward goods, a weaker US dollar, generous government stimulus, vaccine optimism and pandemic caused disruptions in supply chains.
“The surge in commodity prices over the past year now guarantees higher goods price inflation this summer. Indeed, during the next few months even top-line consumer price inflation in countries such as the United States will rise to rates not seen in nearly ten years. The question for business managers and policymakers is whether this burst of inflation is temporary or the start of something more pernicious?
“Based on our review of fundamentals across several industries: oil, chemicals, steel, copper, zinc, lumber, pulp and rubber, we believe the rise goods price inflation will prove temporary. We do see a continuing recovery in demand over the near-term, though the coming release of pent-up spending should be blunted somewhat by a shift back toward services, as consumers return to more normal consumption patterns.” – John Mothersole, pricing and purchasing research director, IHS Markit
The key to this ‘temporary’ rise in price inflation, however, lies on the supply-side. Assuming the disruptions and bottlenecks that have plagued supply chains during the past year are resolved as the pandemic recedes, we see better balances developing in markets with cost pressures dissipating. In many industries our review of available capacity implies not just an absence of further price increases (i.e. no inflation), but even price declines.
For example, it is hard to see lumber prices in North America holding anywhere near current levels, (40% above their previous peak set only this past September), once sawmills begin operating closer to capacity and housing markets cool. Likewise, rates for ocean going shipping will drop, while surcharges for express handling or expedited loading will not be tolerated, after capacity returns and companies better position ships and containers to align with trade flows.
Risk clearly leans to the upside in the current environment. Demand could continue to run ahead of effective capacity if problems on the supply-side of markets persist, leading to further increases in prices. And for policymakers, a concern must be that the coming shift in consumer spending patterns may keep markets off balance, with pressures emerging in service industries in the same way now seen in manufacturing.
“For now, at least in goods producing industries, the rise in prices should be best viewed as an event tied to the pandemic that is unlikely to persist indefinitely. Markets inherently abhor the kind of disequilibrium conditions they now find themselves in. Given time to respond to the signals being conveyed by prices, adjustments will be made, both on the demand and supply-side of markets.
“The relevant question then is not whether these adjustments will take place, but how long they will take - six months, a full year or longer? Signposts of a change should appear in spot prices and in data sets like IHS Markit’s Purchasing Manager Indexes for manufacturing backlogs, delivery times, inventory and input costs” – John Mothersole, pricing and purchasing research director, IHS Markit
The IHS Markit Materials Price Index (MPI) measures a weighted average of weekly spot prices for a key collection of globally traded manufacturing inputs. The components are crude oil, chemicals, nonferrous metals, ferrous metals, paper pulp, lumber, rubber, fibers, tech components, and ocean-going freight rates. It seeks to capture the commodity input costs for a diversified global manufacturer.
