MNI INTERVIEW: Highest US Factory Prices in Decade May Persist

U.S. manufacturers could see price gains remain around the fastest in more than a decade over the next few months as the ISM index rebounds, survey chair Tim Fiore told MNI Monday.

"All indications are that prices are going to continue to stay high through Q1 and into Q2, which would indicate you're going to have a really strong economic expansion here for this year," said Fiore.

The April and May ISM reports may start to see more comments on manufacturers' ability to pass on price increases, Fiore said. High factory prices may also soon start being passed on to consumers, he said.

The Institute for Supply Management's price index rose 3.9 points to 86 in February, the ninth consecutive increase. The jump reflects stronger demand, labor issues, and supply chain bottlenecks, Fiore said, pointing to increased prices of steel, plastics, and food.

The balance of opinion in the ISM report showed 73.1% of respondents seeing higher prices, up from 64.3% in January and more than double the share from October.

SAVINGS BOOST

One risk is that some of the gains in manufacturing are diverted as the rollout of vaccines allows customers to spend more on services later this year, he said.

High consumer savings mean there's probably still enough demand to sustain both industries. "You're going to have a shift to services but you may not have an immediate decline in the manufacturing side," Fiore said.

The overall ISM manufacturing index increased 2.1 points to 60.8 in February, the highest reading since 2018 and marking nine consecutive months of expansion.

February's headline monthly increase was driven by a 3.7 point rise in new orders. Supplier deliveries gained 3.8 points to 72 and the backlog of orders increased 4.3 points to 64, reflecting supply chain and employment constraints.

WAGES MAY JUMP

"The only way they can get to those production levels is to run multiple shifts," Fiore said. "Most of them are really not at the level that they were pre-pandemic."

Companies eager to boost production amid worker fears of Covid that are boosting absenteeism mean "wages are going up" at the bottom of the income spectrum, he said.

"There is a lot of pressure at that level," said Fiore. Earlier forecasts for 2.5% wage and benefit growth "is probably going to be blown right by."