Chart of the week
The latest ISM and PMI index surveys show that both input and output prices have hit record highs. Amid rising inflation fears, do these data signal a shift towards a new regime?
The curves of these indicators overlap quite well with those of inflation, but as the graph above shows, the correlation between the price components and the evolution of inflation over the following year is very weak. In other words, the points of the cloud appear to be randomly scattered when plotting the pairs of points of these two variables between 1998 and 2019.
In the short-term, base effects will result in a faster inflation rate. Furthermore, as economies start re-opening, bottlenecks can be expected to emerge that may drive costs higher. However, these are temporary issues that should fade as economies return to normal.
Next year, once transitory effects have dissipated, the focus will be on the impact of stimulus measures on business activity and labour market tensions. In the meantime, the chart above shows that the currently high price component readings alone provide little information about the inflation picture one year from now.
The following opinion was written on April 9th 2021 and is susceptible of changing.
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