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Forget the noise, inflation's heading higher

Forget the noise, inflation's heading higher

February 2018

Patrick Zweifel, Chief Economist

Rising supplier delivery times offers more evidence that US inflation is heading higher.

Whatever the minutia of the monthly data, US inflation is clearly trending higher. And it’s a trend that’s likely to hold for the rest of the year, based on an indicator that has a good record of anticipating consumer price pressures.

Supplier delivery times – which are a component of the US Purchasing Managers’ Index – suggest that the US core consumer price index (CPI excluding volatile food and energy prices) will be heading higher for months to come [see chart]. That makes sense. The stronger the demand, the longer it takes firms to fulfil all the orders. Eventually, companies respond by raising prices. Right now, US supplier delivery times are running at their longest since 2012. Historically, these sorts of spikes have been associated with rapid year-on-year moves in core CPI.

This squares with our view that the long dormant Phillips curve is springing back to life. That’s to say, the traditional relationship between unemployment and inflation is reasserting itself – low jobless rates translate into rising wages which, in turn, feed into higher consumer prices.

supplying inflation

US delivery times vs core consumer price index

multi asset blog us inflation

*Year on year per cent change **PMI Delivery Times, 6m average, lagged 1 year; Source: Datastream. Data as of 20.02.2018