MNI INTERVIEW: US Factory Prices Seen +3% Amid Best ISM in 38Y

U.S. manufacturers are holding back on massive price increases amid the strongest backdrop in nearly four decades, Institute for Supply Management chair Tim Fiore told MNI Thursday.

"I don't want to call it inflation yet," Fiore said in an interview. "I'm not overly concerned about it. It's just a healthy indication of supply and strong demand."

"We've predicted prices will be up about 3% at the end of the year, with 2.5% of that being experienced in the first half of the year," he said, suggesting price pressures could be transitory.

That outlook meshes with Federal Reserve officials who see long-term inflation pressures as modest and argue it's premature to open a debate about "substantial progress" that could bring a slowing of bond purchases. Charles Evans at the Chicago Fed has said given past struggles to meet a 2% target, 3% inflation isn't a big problem and could help the Fed reach its goals sooner.

Even with the Institute for Supply Management's price latest price index around the highest since 2008 at 86.6, pricing plans aren't as dramatic as the overall index. The ISM factory measure reached the highest since 1983 at 64.7 in March.

PASSING ON THE COSTS?

The ISM report also showed signs that price gains could fade later this year. For starters, Fiore pointed to a U.S. dollar that has strengthened recently following some weakness that boosted production costs.

Supply chain constraints amid pandemic lockdowns also pushed the ISM supplier deliveries measure to 76.6 during the month, the highest since 1974. Employers are having trouble finding skilled workers and coping with high absenteeism rates during the pandemic, Fiore said, and firms are also hindered by transportation issues and a lack of truck drivers.

But supply chain pressures may begin to alleviate in late summer, Fiore said, though that's later than his previous view it would be early summer.

"The only thing to relax prices will be when demand goes away and I don't see demand going away in the short term," he said. "And even then there's a whole bunch of inventory that has to be rebuilt." President Joe Biden's USD1.9 trillion relief package will further underpin household demand, he said.

The real key is whether manufacturers pass on higher costs to consumers and whether they able to do that without seeing a hit in demand, he said. "We won't know that until the earnings calls come out in April and July," Fiore said.