- Although January’s manufacturing PMI fell to 57.3 from 57.9 in December, growth in both output and employment picked up. Some of the decline in the PMI reflected an easing of supply constraints.
- This development may have contributed to slower growth in costs and prices. As spending patterns normalise and supply frictions ease, capacity pressures should continue to moderate, contributing to inflation falling later this year.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Interpreting the manufacturing PMI continues to require increased care. A fall in the headline index in January to 57.3 from December’s 57.9, leaving the PMI at a four-month low, appeared to disappoint.
“But the IHS Markit/CIPS survey’s measure of output growth accelerated to a six-month high and employment growth was the second strongest in 11 years. Some of the decline in the PMI reflected a slowdown in new orders growth. But it was also a consequence of signs that supply-side pressures may be easing. In January supplier delivery times lengthened to the smallest extent since November 2020.
“This development, alongside the improved availability of raw materials, translated into a slowdown in manufacturers’ input price inflation to the weakest since April 2021. Growth in the price of finished goods in January also slowed – but it should be noted that both were still high by past standards. And with oil recently rising above $90 per barrel for the first time since 2014, not all cost drivers are easing.
“But a relaxation of the capacity and price pressures faced by manufacturers should continue. The global move towards lifting COVID-19 restrictions will take some of the heat out of goods demand, as consumer spending shifts to services. And some manufacturers may have overordered during the pandemic to guard against shortages which could now turn into a glut of inventories, putting downward pressure on prices. These factors contribute to the EY ITEM Club’s expectation that inflation should head down later this year.”