Global inflation has been stubbornly persistent recently, particularly in the manufacturing sector. Financial markets continue to fluctuate as experts assess the evolving landscape.
The U.S. bond market reflects this dynamic, with the 10-year Treasury yield at 4.434%, down 6.6 basis points, and the 10-year German Bund yield at 2.618%, down 4.5 basis points. In corporate bonds, the option-adjusted spread on US investment grade bonds has risen by 3.4 basis points. In particular, the utilities sector is taking advantage of lower funding costs to finance new projects and support M&A activity, while the financials sector is trending higher. Meanwhile, the US High Yield Option Adjusted Spread has narrowed by 1.9 basis points on the back of solid employment data, reversing the widening of spreads in the High Yield sector. The telecom and technology sectors have been strong performers, while the consumer discretionary and energy sectors have been relatively weak.
Recent reports from S&P Global highlight the increasing pressure on US manufacturers to raise input costs. Rising prices for metals, chemicals, plastics and wood products have led to the steepest cost increases in about 18 months. According to John Smith, chief economist at XYZ Financial, "Manufacturers are feeling the pinch with input costs rising significantly. This pressure will eventually trickle down to consumers, although we haven't seen a full pass-through to selling prices yet.
Further complicating the picture, wage growth has been slowing across sectors. In July 2023, wage growth in the manufacturing sector was recorded at 5.45 percent, falling to 5.11 percent by May 2024. In the services sector, wage growth falls from 22.07% in March 2023 to 3.85% in May 2024. Similar trends are seen in the construction and leisure and hospitality sectors, indicating a broader slowdown in wage growth.
MarketWatch Senior Analyst Sarah Lee noted, "The slowdown in wage growth is a double-edged sword. It helps contain costs temporarily, but it points to lingering inflationary pressures."
This disparity in input cost burdens between the manufacturing and service sectors is alarming. Lee pointed out, "Manufacturing is taking a bigger hit. This could be a harbinger of future inflation, although current output cost inflation remains above pre-pandemic levels and is slowly declining."
Globally, inflationary pressures are also widespread. The Eurozone PMI report shows that selling prices, particularly in the services sector, are stabilizing at a three-year low. Professor Michael Green, Head of European Economic Studies at ABC University, was cautiously optimistic about the Eurozone. "While manufacturing inflation is picking up, it's not yet alarming. However, the global trend of rising input costs is evident".
In major economies such as Japan and the UK, there's an upturn in manufacturing and sales. Although manufacturing inflation is lower than in the 2021-2023 period, it still outpaces inflationary pressures in services. Rachel Adams, lead analyst at Markit, noted, "Inflation in goods, driven by wages and raw material costs, is the new variable to watch. Future inflationary pressures could shift from services to commodities."
Despite the complex global inflation dynamics, the bigger concern is the impact of input costs on the broader economy. "The global economic outlook depends on how these costs are managed and passed through the supply chain," Smith concludes.
As utilities finance new projects and engage in mergers and acquisitions amid lower financing costs, and given the differing performances and weaknesses of different sectors, monitoring input costs will be critical. Persistent inflation, particularly in the manufacturing sector, poses a significant challenge to global economic stability.
