Factory input costs soar! PMI worldwide has sounded the alarm: Is a price hike wave coming?

Why is the PMI data falsely inflated by supply shocks?

Cailian Press, April 2 (Editor: Xiaoxiang) The latest data released this week shows that, affected by the Middle East war, factories around the world in March are facing problems such as soaring input costs and supply chain disruptions, while weak underlying demand is threatening the momentum of a fragile manufacturing recovery.

This geopolitical conflict has disrupted global logistics networks, resulting in delivery delays, driving up input-price inflation, and distorting overall growth indicators.

Rising oil and energy prices have prompted many manufacturers to take countermeasures, raising their sales prices.

Chris Williamson, Chief Business Economist at S&P Global, said that because supply shocks have led to longer delivery times—typically seen as an indicator of increased economic activity—the composite PMI data has been artificially and falsely inflated.

This is especially true for the Eurozone composite PMI index. The S&P Global Eurozone Manufacturing Purchasing Managers’ Index (PMI) released on Wednesday rose from 50.8 in February to 51.6 in March, exceeding the initial estimate of 51.4.

But many people in the industry are not at all pleased with the strong performance of the overall data. Hayes, Chief Economist at S&P Global Market Intelligence, said: “The Middle East conflict has left its mark on Eurozone manufacturing. As the logistics market re-adjusts to maritime disruptions, supplier delivery times have increased significantly, and the surge in oil and energy prices has pushed factory input cost inflation to the highest level since the end of 2022.”

By category, driven by the rise in energy prices, the Eurozone input cost inflation rate surged to a 41-month high. Many manufacturers’ response to this has been to raise their sales prices at the fastest pace in more than three years. “We see that some of the inflationary pressures driven by the war in March are being transmitted directly to final prices, which will ultimately weaken the Eurozone’s competitiveness,” Hayes said.

In the UK, which has left the European Union, cost pressures have also risen sharply, and because ships are avoiding the Strait of Hormuz, delivery delays have reached the longest level since mid-2022.

Similar phenomena are also appearing in the United States. The Institute for Supply Management (ISM) announced on Wednesday that the US March Manufacturing Purchasing Managers’ Index (PMI) rose slightly from 52.4 in February to 52.7, the highest reading since August 2022. But at the same time, affected by the Middle East war, the factory raw material procurement price index increased from 70.5 in February to 78.3, reaching a new high since June 2022, and supplier material delivery lead times have also been extended.

Is the situation most severe in Asia?

Worth noting is that, at least for now, the Asian economies hit deepest by disruptions stemming from the Strait of Hormuz blockade are undeniably facing the most severe circumstances.

Unlike Europe and the United States, in Asia, many economies’ PMI indices have already begun to fall, indicating that the negative impact of surging fuel costs and heightened uncertainty caused by the Iran war is increasing.

These survey results highlight the challenges faced by Asian policymakers. The region buys about 80% of its oil transported through the Strait of Hormuz, which makes many countries vulnerable to energy shocks triggered by the war—currently, Filipino drivers are facing a situation where diesel prices are triple, Vietnam is facing aviation fuel shortages, and South Korea’s main cosmetics companies are scouring for plastic resins.

The China March Purchasing Managers’ Index (PMI) jointly released by S&P Global and RatingDog on Wednesday shows that China’s March manufacturing PMI recorded 50.8, remaining above the breakeven line for the fourth consecutive month, but down from 52.1 in February.

PMI data from other Asian economies also show that manufacturing activity has slowed, from India to Indonesia, Vietnam, and the Philippines, highlighting that the Middle East conflict has already brought shocks to businesses.

Japanese factories are also hit by a deterioration in business sentiment and cost pressures, which have reached a 19-month high. S&P Global Japan Manufacturing PMI final stood at 53.0, dropping sharply to 51.6. The growth in input prices hit the highest level since August 2024.

In South Korea, driven by semiconductor demand and new product launches, the pace of expansion in factory activity reached the highest level in more than four years. However, due to the surge in oil prices and the weakening won, the rise in input prices also reached the highest level since June 2022, and the price-hike wave is raising concerns.

JPMorgan senior analyst Rajiv Batra said earlier this week that the Middle East war has the greatest impact on Asian countries; however, within Asia, the oil-shock impact on China and Malaysia is relatively smaller.

(Cailian Press, Xiaoxiang)