Source: Economics Group of Wells Fargo Bank, N.A.
Summary
In addition to the pricing pressures from the service sector, Fed policymakers now have to reckon with the highest prices paid reading for manufacturing since the current tightening cycle was just getting started in the summer of 2022.
Not What Fed Wanted to See for Prices
The ISM index slipped back into contraction territory, but only barely so at 49.2 (chart). The biggest development in today’s report is that the prices paid index shot up more than 5 points to 60.9. If the prices paid component factored into the headline (it does not), it might have kept the overall index above 50. Of the five sub-components that feed into the headline, four were below 50 in April.
In the past decade, the only time that the ISM prices paid component was above 80 was during the heady stimulus fueled days of 2021 & 2022 (chart). Yet as soon as the Federal Reserve began raising rates in March 2022, the fire went out quickly in terms of price pressures from manufacturing. Supply chain normalization was a key factor here as well. Prices fell into contraction territory by autumn 2022 and did not rise above 55 until last month. Now, it is above 60, showing that the Fed’s difficulties in getting inflation in check extend beyond the service sector, even if that is where the problem is the most pressing at the moment.
Today’s print for prices paid is a tough pill to swallow. It’s consistent with the recent uptick in commodity prices and adds further evidence that the disinflationary trend from goods isn’t going to be as much of a support factor in cooling inflation this year as it was last year. Thirteen industries reported paying increased prices for raw materials, and only one reported a decrease.