Inflationary pressures threaten manufacturing sector

The latest seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers Index (PMI) rose to a new high of 62.0 in January, from an upwardly revised reading of 58.7 in December.

According to the survey, manufacturing production rose for the 20th consecutive month in January, underpinned by quickening pace of new work.

Output growth hit a record high in the consumer goods sector, but also accelerated for capital and intermediate goods producers.

Companies reported improved demand from domestic and overseas markets, while new product launches, successful promotional activity and client restocking also contributed to new order growth.

Manufacturing employment also increased for the 10th successive month in January. Companies linked jobs growth to rising production requirements, improved market conditions, business development and the launch of new product lines. Part of the increase reflected efforts to combat rising levels of outstanding business, as backlogs accumulated for the third month in a row.

Inflation

Inflationary pressures continued to build in January, with substantial increases signalled for both input costs and factory gate prices.

Average purchase prices rose at the steepest pace in the survey’s history, with more than three-fifths of companies reporting an increase. Manufacturers indicated a vast array of inputs had risen in price, including chemicals, cotton, energy, food products, metals, packaging, paper and timber.

Average output prices rose for the 15th successive month in January, mainly reflecting increased input costs. This was further highlighted by the sectors reporting the steepest inflation of output prices — chemicals and plastics, timber and paper, food and drink, and textiles and clothing — also seeing the sharpest increases in costs.

Rising output requirements and efforts to protect against expected future price increases led to a near survey record increase in purchasing activity. Subsequently, holdings of raw materials rose at the quickest rate since data were first collected in January 1992. Meanwhile, stronger demand for raw materials led to a marked increase in vendor lead times, as sellers’ markets continued for certain inputs.

David Noble, chief executive officer at the Chartered Institute of Purchasing and Supply, said: ‘The significant increase in purchasing activity shows that manufacturers are feeling confident about the future and ensuring they have sufficient stock to meet increased orders. It’s also apparent that most are looking to build up inventories and make certain that they’re not caught short in the face of raw materials shortages.

‘Manufacturers will be watching intently to see how the government and Bank of England move to tackle the issue of rising inflation, and hoping for stimulation to encourage continued growth in a sector which is currently leading the way towards UK recovery.’

Echoing these sentiments, Lee Hopley, EEF chief economist, said: ‘This incredibly strong start to the year at home and abroad is only countered by price pressures, which are posing a stark challenge for firms trying to sustain growth through what is likely to be a challenging year.

‘The government has a key role to play in throwing off the burdens of higher taxes and regulation and the Growth Review needs a cold, hard look at whether polices will now nurture or derail companies’ plans to invest and grow in the UK.’

The Markit/CIPS UK Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 600 industrial companies.