European manufacturers are passing higher input costs on to their customers, sending eurozone inflation to its highest level for almost a year as shortages of materials and soaring shipping costs disrupt supply chains.
Efforts to cushion rising costs are driven by the sentiment that supply chain bottlenecks are unlikely to ease in the short term, according to industry and shipping executives. More expensive manufactured goods are in turn fuelling expectations of a further surge in inflation, which Germany’s central bank is already warning will reach its highest level since the 2008 financial crisis by the end of this year.
“As we go into the recovery in the second half of this year, this inflation at the factory gate will increasingly be passed through to the consumer,” said Katharina Utermöhl, economist at Allianz.
Eurostat data released on Tuesday showed overall eurozone inflation jumped to 0.9 per cent in January, breaking a five-month spell of falling prices. Higher prices for non-energy industrial goods were the biggest factor, contributing more than 40 per cent of the year-on-year increase in inflation.
Input prices for eurozone manufacturers rose this month at a rate not seen for almost 10 years, according to the closely watched IHS Markit purchasing manager survey. The impact was felt hardest in the car, chemicals, metal and mining, resources and basic materials sectors.
As demand for many goods outstripped supply and exhausted the capacity of shipping companies, delivery times lengthened to the greatest extent since survey data started in 1997, with the exception of April 2020, when global factory closures wrecked supply lines.
Shortages of many products from semiconductors to steel have again caused some manufacturers to cut back production, leaving them scrambling to rebuild stocks and unable to meet rising demand.
“Steel is used a lot in our industry and that is an area where we are hearing companies say they are having shortages,” said Ralph Wiechers, chief economist at the VDMA, which represents Germany’s mechanical engineering sector.
“It takes some time to realise this is happening because they usually have a certain amount in stock and orders have only recently been improving,” he said.
Volkswagen warned recently that it may have to furlough thousands of staff again if chip shortages force it to close production lines as it and several other European carmakers did for the same reasons last month.
Rolf Habben Jansen, chief executive of German container shipping group Hapag-Lloyd, said at a briefing last week that all its ships were now at sea and idle capacity in the sector was “virtually down to zero”, forecasting this “perfect storm” would last at least a few more months.
The cost of transporting a 40ft container from China to Europe rose from about $1,400 in March 2000 to almost $8,000 this month, container freight data by Freightos shows, although most big manufacturers are shielded from the price rises by longer term contracts.
The Hapag-Lloyd boss said many of its containers were full of computers, fitness equipment, power tools and games consoles. “As travelling, dining, going out was not possible in 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 rose to their highest levels since the early days of the coronavirus pandemic with Brent crude rising above $61 a barrel this week.
Meanwhile, copper prices hit a nine-year high this month, the price of hot rolled steel in Europe reached its highest level since 2008, and the cost of polymer resins used to make plastic rose by a quarter since December to a six-year high.
So far, higher raw material costs are only partially being passed on by manufacturers raising prices to customers and they are not being matched by cost inflation in other sectors.
The PMI index for eurozone services input prices was modest compared with those in the manufacturing sector, despite rising in February to the highest since August, while most services businesses continued to report falling output prices.
The eurozone PMI index for manufacturing output prices was much lower than input prices, even though in February it rose to the highest level in more than two years.
However, selling price expectations for the next three months among EU and eurozone manufacturers rose in February to the highest level since June 2019, according to European Commission survey.
The Ifo Institute in Munich said its survey of German businesses this month found the proportion of manufacturers planning price increases in the coming months had one of the biggest monthly jumps, climbing close to a two-year high.
Economists, however, said higher prices at the factory gate will not be long-lasting and are being partly offset by more sluggish demand for many services hit by the pandemic, such as package holidays and travel, limiting the overall impact on inflation.
“Supply disruptions — ‘cost push’ — are largely a result of the pandemic and are likely to be only a temporary phenomenon,” said Andreas Rees, an economist at UniCredit. “Output gaps will remain negative for the time being, especially in the services sector, and therefore limit the scope of demand-pull inflation.”
Central bankers are also less concerned about the supply-side driven inflation than if it reflected a recovery in overall demand. Christine Lagarde, president of the European Central Bank, said this month: “It is going to be a while before we are worrying about inflation,” forecasting eurozone price growth will remain below its 2 per cent target for years.
Allianz’s Utermöhl said the ECB should not be worried about rises in the prices of goods: “If anything it is a positive story of restarting the engine and things moving in the right direction.”