United States: Manufacturing resilience fuels inflation risks – MUFG

MUFG’s Derek Halpenny and Abdul-Ahad Lockhart underline that the latest ISM Manufacturing data show strong United States (US) economic resilience despite Middle East uncertainty. The headline index has reached a four-year high, with broad-based gains across sub-indices and rising new orders. MUFG’s inflation composite points to energy and manufacturing inputs as key drivers of ongoing price pressures, complicating the Federal Reserve’s policy stance.

Strong ISM and Oil lift inflation composite

"The renewed pessimism over finding a resolution in the US-Iran conflict after two weeks of optimism highlights the back and forth in expectations over the path forward in the Middle East. That uncertainty is generally bad for business, but the ISM Manufacturing report yesterday suggested US companies are managing to deal with this uncertainty that has now existed for three months. The overall index jumped to 54.0 in May, the highest in four years with four of the five sub-indices that contributes to the headline index all rising."

"From a modelling perspective, the ISM manufacturing prices index remains a key input into our US inflation composite index. Although the manufacturing PMI has had a diminished direct market impact in recent years, it continues to provide a reliable signal on the cyclical backdrop. On a rolling two-year basis, the latest ISM manufacturing prices index represents a +2 standard deviation shock, adding upward pressure to the overall index."

"Looking at the rest of the components for our US inflation composite index, we see energy and manufacturing inputs continue to drive inflation pressures. Elevated oil and commodity prices are reinforcing upstream price pressures. By contrast, domestic wage dynamics remain contained and are not a key driver of current inflation trends."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)