Inflation is now embedding its tentacles across the economy. The latest AIB purchasing managers’ index (PMI) shows the significant impact on businesses, now being passed on through the supply chain to customers. Late last year businesses were holding off passing on higher prices in the hope that the jump in inflationary pressure was a post-Covid phenomenon. Now it is clear that price rises are being passed on, generally reflecting the higher costs that businesses are facing. Prices are now rising at their fastest level since the survey started in 1998.
Normally higher prices reflect rising demand for goods – and there was a jump in purchasing as the world emerged from Covid. The initial surge of inflation late last year reflected the difficulty which businesses were having meeting this rising demand. However, price rises are now more of a reflection of higher costs for energy and other inputs. While there has been some relief on oil prices, businesses remain very exposed to sky-high gas prices, which affect big companies quickly in reaction to what happens on the wholesale market for gas, where prices are at near-record levels.
Notably, the PMI data shows that demand is now weakening as high prices and the cost-of-living crisis hit home. It shows a continuing loss of momentum in the manufacturing sector, with the second consecutive monthly fall in output and, crucially, in new orders. This underlines the wider threat facing the EU and Irish economies - a period of low growth and relatively high inflation. In turn this is problematic for the ECB as it may be accused of worsening the outlook for growth as it raises interest rates to control inflation.
The pace of change in key indicators has been notable in recent months. The PMI index remains – just – in positive territory and there is hope that some key manufacturing and traded services sectors may help to cushion the economy a bit, as happened during Covid. Tax returns and employment have remained strong. The indications are growing of an imminent slowdown, but it is not clear yet how prolonged or damaging it might be.