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Rising Core Inflation Should Follow The Surge In Manufacturing PMI

  • Despite the elevated restrictions imposed by governments in the first quarter to fight the pandemic, we saw that manufacturing PMIs have surged to new highs in most of the developed economies.
  • US ISM manufacturing PMI rose to 64.7 in March its highest level since December 1983.
  • Interestingly, the chart below shows that ISM manufacturing PMI have led Core CPI by 21 months in the past 25 years, and therefore are currently pricing in much higher core CPI prints in the coming months.
  • Policymakers have repeated several times that they remain confident that the rise in inflation will only be temporary and therefore hinted the market that they will let inflation overshoot their target in the near term.
  • At the same time, PMIs have also been very sensitive to the recovery in markets (reflexivity between financial markets and economic data) and therefore business surveys may start to ease in the medium term as developed market central banks prepare for a QE taper / interest rate hikes through 2022.

Source: Bloomberg/MNI

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