Supply Chain Managers May have to Dust Off Old Playbooks for Rising Prices

In good economic news, the February Purchasing Index came 60.8 percent, an increase of 2.1 percentage points from the January reading of 58.7, as released Monday by the Institute for Supply Management. It also means the index was well above the 50 mark that separates US manufacturing expansion from contraction.

Supply Chain Digest Says...   After many years of low inflation in the US, that may be changing – and supply chain and procurement managers will have to dust off old playbooks if it really does rear its head. What do you say? Click here to send us your comments   Click here to see reader feedback

The strong PMI indicates expansion in the overall economy for the ninth consecutive month in a row after contraction in March, April, and May.

In positive news for future manufacturing activity, the ISM New Orders Index was a strong 64.8, up 3.7 percentage points from the January reading of 61.1.

That is all to the positive. The growing worry – inflation building in the supply chain.

The ISM Prices Paid Index that is released with the PMI came in at an incredibly high level of 86, meaning 86% of ISM survey respondents reported seeing higher input prices.

The rising specter of inflation can be seen by a sampling of respondent comments published by ISM:

"Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding. In addition, the tariffs and anti-dumping fees/penalties incurred by international mills/suppliers are being passed on to us." (Transportation Equipment sector)

"Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up." (Machinery)

"We have seen our new-order log increase by 40 per cent over the past two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule." (Primary Metals)

The UK's Financial Times notes that "You get the picture: demand is robust, but producing the goods for customers is proving problematic."

And there you have the fundamentals of inflation: too many dollars chasing too few goods.

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The Financial Times adds that "We already knew that the rise in oil prices and pent-up demand for services was likely to trigger a rise in CPI inflation in the coming months," adding that "If producers manage to pass on these higher costs to consumers, then the rise will be even stronger."

After many years of low inflation in the US, that may be changing – and supply chain and procurement managers will have to dust off old playbooks if it really does rear its head.

Do you see signs of supply chain inflation? Let us know your thoughts at the Feedback section below.