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Updated 16:50 20/04/21

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Early signs of inflation as factories report rising costs


Michael Pinson, News Editor
2 Mar 2021, 3:22 p.m.

Factories in the UK, EU and US have all reported increasing costs, in what could be some of the first indications of inflation to come in the months ahead.

Yesterday’s PMI figures showed that factory output in the UK also fell to the lowest rate in nine months, when growth returned following the end of the UK’s first lockdown.

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Shipping containers.

UK factories have reported severe disruption in the first two months of 2021, with the pandemic and Brexit among the two most common causes named. Staff absences due to illness/self-isolating have hampered production capability. The new rules introduced following the Brexit transition have also led to significant disruption, with supply lines stretched and deliveries taking longer to pass through the border.

The disruption has led to shortages of raw materials and key components for many companies, leading to a rise in prices. In the UK this saw prices rise to a four-year high. European factories meanwhile saw prices climb to their highest in nearly a decade. This was reflected in US factories as well, with prices rising at their fastest rate since 2011.

It was announced today that German exports to Britain slumped by 30% in January 2021 versus the same period in 2020, as businesses found materials slow to arrive and more expensive to purchase and switched to other suppliers. In the long-term, new opportunities could arise for UK suppliers to expand their services and replace previous EU suppliers, but it will take time for these companies to settle into the new post-Brexit supply chain.

New orders have increased for manufacturers globally, highlighting the pent-up demand from the thousands of businesses unable to trade over the course of the past year. With supply issues not expected to be overcome quickly or easily however, the increased demand will only add further pressure to supply lines and see prices rise further.

As prices rise, these will inevitably trickle up the supply chain, and will ultimately be passed on to the end user. There has been some evidence of prices rising in some sectors, but markets are now carefully watching for further signs of inflation.

Concern over inflation was evidenced last week by rising bond yields, which caused a week of uncertainty for stock markets. The concern is that if inflation does begin to rise, central banks may reign in the fiscal stimulus measures they have been so liberal with in the past 12 months. For now however central banks have been quick to reassure that fiscal stimulus will continue. This does however require money-printing to pay for it, which in turn increases the risk of inflation, leaving a potential sense of inevitability to inflation eventually rising, and significantly.

Inflation is expected to be a key driver for the gold price in the year ahead, as gold often acts as a hedge against rising inflation. Yesterday’s PMI figures could be one of the early signs of inflation to come if supply disruption continues, while demand rises on the back of easing restrictions.

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