Cost inflation causes 'wintry chills' for manufacturers

1 March 2017

UK manufacturing continued to see new orders grow and production rise throughout February, according to the latest PMI.

The Markit/CIPS UK Manufacturing Purchasing Managers' Index showed expansion slowed, but it remained well above the long-term average.

The index eased to 54.6 in February, down on 55.7 in January and a three-month low, but firmly above the long-term average of 51.6.

Solid growth was seen in the consumer, intermediate and investment goods sectors, with the latter registering the sharpest rise.

Steady expansion of new order volumes underpinned the increase. And despite companies indicating that growth in new domestic orders was slowing, this was partly offset by a sharp upturn in growth in new export business. Improved sales were reported in mainland Europe, the US, Asia, Australia, Canada and Ireland.

Around 50% of respondents are expecting output to be higher in a year’s time, with only 6% predicting a decline.

Improved demand, increased capital investment, company expansion plans and new product releases were cited as reasons for improved optimism, underpinning further increases in employment and purchasing activity during February.

Purchasing activity increased at the same rate it had in December, when it reached a two-and-a-half year high.

Rising demand for raw materials caused pressure on supplier capacity and led to inputs shortages in some areas while supplier lead times lengthened, becoming the second longest since mid-2011.

Purchase prices rose sharply on the back of supply chain disruption and the cost impact of the weak sterling.

Input cost inflation was down from January, when it reached a record high, but was still among the highest levels seen in the survey’s history, and this led output charges rising at a near-record rate.

Duncan Brock, director of customer relationships at CIPS, said: “Buoyant economic conditions gave the sector a spring in its step... Manufacturers had the confidence to maintain good levels of job creation.”

He blamed “any lingering wintry chills” on the continuing rise in input prices.

“This month, the impact of the weak pound combined with a shortage of some raw materials meant cost inflation remained at one of its highest levels since records began. Consequently, suppliers were squeezed and delivery times were lengthened,” he added.

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