European manufacturers pass higher input costs on to their customers, pushing eurozone inflation to its highest level in nearly a year as material shortages and soaring shipping costs disrupt chains supply.
Efforts to cushion rising costs are motivated by a sentiment that supply chain bottlenecks are unlikely to ease in the near term, according to industry and shipping executives. More expensive manufactured goods in turn fuel expectations of a further surge in inflation, which The German central bank is already warning will reach its highest level since the 2008 financial crisis by the end of this year.
“As we enter the recovery in the second half of this year, this factory-gate inflation will increasingly be passed on to the consumer,” said Katharina Utermöhl, economist at Allianz.
Eurostat data released on Tuesday showed headline inflation in the euro area jumped to 0.9 percent in January, breaking a five-month period of price decline. Rising prices for non-energy industrial products were the most important factor, contributing more than 40% of the annual rise in inflation.
Input prices for euro area manufacturers has grown this month at a rate not seen in nearly a decade, according to the survey conducted closely by purchasing managers at IHS Markit. The impact was hardest felt in the automotive, chemicals, metals and mining, resources and basic materials sectors.
The demand for many products exceeds the supply and exhausted capacity shipping lines, delivery times have been the longest since survey data began in 1997, with the exception of April 2020, when global plant closures destroyed supply lines.
Shortage of many products semiconductors steel have again prompted some manufacturers to cut production, leaving them scrambling to replenish their stocks and unable to meet growing demand.
“Steel is used a lot in our industry and this is an area where we hear companies say they are facing shortages,” said Ralph Wiechers, chief economist at VDMA, who represents the industry. mechanical engineering in Germany.
“It takes a while to figure out that this is happening because they usually have a certain amount in stock and orders have only improved recently,” he said.
Volkswagen recently warned that it could have to lay off thousands of employees again if the chip shortage forces it to shut down production lines, as it and several other European automakers have done for the same reasons this month. latest.
Rolf Habben Jansen, managing director of German container shipping group Hapag-Lloyd, said in a briefing last week that all of his ships were now at sea and idle capacity in the area was “close to zero” , predicting that this “perfect storm” would last at least a few more months.
The cost of transporting a 40-foot container from China to Europe has dropped from around $ 1,400 in March 2000 to nearly $ 8,000 this month, according to Freightos container freight data, although most large manufacturers are protected from price increases by longer term contracts.
The Hapag-Lloyd boss said many of his containers were stocked with computers, fitness equipment, power tools and game consoles. “Since it was not possible to travel, eat or go out on lockdown, consumers instead spent money on goods and improving life at home,” he said.
Manufacturers are also facing rising energy and commodity prices, after oil prices hit their highest levels since the early days of the coronavirus pandemic, with Brent topping $ 61 a barrel this week .
Meanwhile, copper prices hit a nine-year high this month, the price of hot-rolled steel in Europe hit its highest level since 2008 and the cost of polymer resins used to make plastic increased by a quarter from December to a six-year high.
So far, higher raw material costs are only partially passed on by manufacturers who raise prices to their customers, and they are not offset by cost inflation in other industries.
The euro area services input price PMI index was modest relative to those in the manufacturing sector, despite rising in February to its highest since August, while most service firms continued to report ‘a drop in production prices.
The euro area PMI index for manufacturing output prices was well below input prices, even though it hit its highest level in more than two years in February.
However, selling price expectations for the next three months among manufacturers in the EU and the euro area rose in February to their highest level since June 2019, according to a European Commission survey.
Munich’s Ifo Institute said its survey of German companies this month found that the proportion of manufacturers planning price increases in the coming months had one of the biggest monthly jumps, reaching nearly a two-year peak.
Economists, however, said the higher prices leaving the factory would not be sustainable and were partly offset by slower demand for many services affected by the pandemic, such as package holidays and travel, limiting the overall impact on inflation.
“The supply disruptions – ‘cost push’ – are largely the result of the pandemic and will likely only be a temporary phenomenon,” said Andreas Rees, economist at UniCredit. “Output gaps will remain negative for now, especially in the service sector, and therefore limit the extent of demand-driven inflation.”
Central bankers are also less concerned supply-driven inflation only if it reflected a pickup in aggregate demand. Christine Lagarde, President of the European Central Bank, said this month: “It will be some time before we worry about inflation”, predicting that price growth in the euro area will remain below its target of. 2% for years.
Mr Utermöhl, from Allianz, said the ECB should not be worried about rising commodity prices: “In fact, it’s a positive story of restarting the engine and progress in the right direction.”