That Bubbling Sound Coming From U.S. Factories May Be Inflation
by Michelle Jamrisko
January 3, 2017, 3:04 PM EST
ISM factory gauge advances to a two-year high in December
Measure of prices paid for materials strongest since 2011
Champagne wasn’t the only thing bubbling at the start of 2017 for U.S. manufacturers: So was inflation, a potential warning sign in an otherwise broadly positive report on American factories.
The Institute for Supply Management said Tuesday that its index of manufacturing increased for a fourth straight month, reaching a two-year high of 54.7 as new orders surged by the most since the summer of 2009 on stronger overseas and domestic demand. Percolating sales were evident in the group’s gauge of prices paid for raw materials, which advanced to 65.5, the highest level since June 2011.
While the ISM sub-indexes can be volatile, the jump in prices caught the eye of factory managers and analysts, with survey chairman Bradley Holcomb noting it was “clearly something to watch” at the beginning of the year. A broad-based increase in costs of inputs for production corroborates signs of higher consumer inflation. The personal consumption expenditures price index — the Federal Reserve’s preferred gauge — is up 1.4 percent on a year-over-year basis, the fastest gain since 2014.
Price pressures are slowly starting to build globally. In China, the world’s second-largest economy behind the U.S., an official manufacturing purchasing managers index remains near a post-2012 high. Economists are taking note of signs that the U.S. economy could find itself at risk of overheating, requiring more ambitious interest-rate increases this year from the Fed.
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