Press release

1 Nov 2021 London, GB

Supply challenges constrain output and push up prices – EY ITEM Club comments

Although manufacturing demand remains strong, supply chain challenges and shortages of raw materials are increasingly constraining production. The IHS Markit/CIPS survey reported its lowest balance for manufacturing output for eight months

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Related topics Growth COVID-19
  • Although manufacturing demand remains strong, supply chain challenges and shortages of raw materials are increasingly constraining production. The IHS Markit/CIPS survey reported its lowest balance for manufacturing output for eight months.
  • Some members of the MPC will no doubt view the renewed pickup in price pressures as further reason to vote for higher interest rates at this week’s meeting. But while the decision is finely balanced, the EY ITEM Club thinks the majority will wait for evidence on the impact of the end of the furlough scheme.

Martin Beck, senior economic advisor to the EY ITEM Club, says:

“After falling for four successive months, the manufacturing PMI edged up from 57.1 in September to 57.8 in October. But digging into the detail, the picture was more mixed. On the plus side, growth in new orders and employment strengthened. But with firms reporting production increasingly disrupted by severe capacity constraints and shortages of inputs, manufacturing output growth slowed to an eight-month low and was barely in expansionary territory. This is a picture that is mirrored across the world, and anecdotal evidence suggests supply chain challenges won’t be completely resolved until the second half of 2022.

“Those challenges are combining with developments in commodity markets to drive up input costs and output prices. October’s survey showed the latter rising at the fastest pace on record. This is likely to continue to feed through to consumer prices, driving CPI inflation above 4% over the next few months. While the EY ITEM Club expects these price pressures to dissipate as supply frictions ease, some members of the MPC are likely to see today’s results as further reason to vote for tighter policy.

“Thursday’s interest rate decision is finely balanced. But the EY ITEM Club thinks the majority will make good on their earlier vow to wait for evidence of the impact of the end of the furlough scheme before they consider voting to raise interest rates. The EY ITEM Club sees February as a more likely time for the first rate hike.”