In each month’s ISM reports, respondents are asked which commodities they have seen price increases and decreases in, as well as which ones are in short supply.  Over the years, we have highlighted trends in this survey as they have often been a good leading indicator of overall trends in inflation. The chart below compares the y/y change in CPI versus the six-month average of the net combined number of commodities up in price in the ISM Manufacturing and Services reports.  All the way back in late 2018, the average net number of commodities rising in price peaked and started to decline from readings in the 30s.  While this reading was on the decline, overall inflation, as measured by y/y CPI, wouldn’t budge below 1.5%.  While it took a global pandemic, the lower prices implied by weaker commodity prices finally flowed through to inflation readings in the last few months as y/y CPI is barely above zero and at levels not seen in nearly five years.

While overall price levels may be rising a lot more slowly, the number of commodities in short supply is coming off levels not seen in at least 20 years.  The chart below shows the number of commodities reported as being in short supply in the monthly ISM Manufacturing and Non-Manufacturing reports.  In this month’s reports for the month of May (reported last week), the total number of commodities in short supply was at 29, which was down from April’s record reading of 33.

Given the basic laws of supply and demand one would think that with a record number of commodities in short supply, inflation pressures would be rising rather than falling.  So, what gives?  The table below lists the commodities that are currently noted as being in short supply along with which report(s) they were noted in.  As you can see, just about all of these commodities are related to the COVID outbreak, and while their prices have surged in the last few months, as a percentage of the overall inflation picture, they still take up a small share of the overall pie.  In other words, shortages are rampant in one sector of the economy, but it’s a very small slice.  Click here to view Bespoke’s premium membership options for instant access to our research and analysis.

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