Record increase for manufacturing costs

1 February 2017

A record increase in input costs has not stopped manufacturers making a strong start to 2017, according to the latest manufacturing PMI.

The Markit/CIPS UK Manufacturing Purchasing Managers’ Index shows new orders expanded at a brisk pace in January and output rose at the fastest rate since May 2014.

However, input cost inflation rose to a record high and output charges saw one of the steepest rises in the index’s history.

Overall, the seasonally adjusted index registered 55.9 in January, just below December’s two-and-a-half year high of 56.1, meaning the overall PMI has remained above the neutral mark of 50.0 for six straight months.

While the rate of growth in new business slowed slightly following the prior month’s high, it remained well above average, with the domestic market providing the bulk of new business wins in January.

New export orders also rose, although more slowly than in December.

Respondents who reported an increase in new overseas work linked this to improving global market conditions and a weak sterling.

Intermediate goods producers registered the strongest sector growth in output and new orders, although the investment and consumer goods sectors also registered continued solid expansion of production and new business.

Average purchase prices rose at the steepest rate in the survey’s 25-year history, driven by a weak sterling and the high cost of major commodities such as oil, plastics and steel.

A sharp rise in average selling prices was driven by improved pricing power and efforts to pass on part of the increasing costs.

Supplier price hikes also raised average purchasing costs in January. Respondents reported higher demand for raw materials and this was testing supplier capacity and leading to some shortages.

A new index tracking business optimism – the Future Output Index – was launched in January, based on a question asking companies if they expect production to be higher, the same or lower in one year’s time.

This index saw confidence rise to an eight-month high in January with almost 51% of respondents expecting output to rise over the next year due to new market opportunities and planned product launches.

David Noble, group CEO, CIPS, said the sector was “awash with optimism”.

But he added that rising input costs and commodity prices could no longer be absorbed entirely by manufacturers, as output prices grew at one of the fastest rates since records began.

“Consumers must soon be wondering whether these rising costs will impact on their daily life,” he said.

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