In each month’s ISM reports on the manufacturing and non-manufacturing sectors, respondents to the survey are asked which commodities are rising in price and which are falling. We track these numbers on a monthly basis and have found that they do a good job of tracking, or even anticipating, moves in the overall headline inflation rate. In both surveys over the last several months we have seen a consistent trend where the number of commodities falling in price has exceeded the number of commodities rising in price. Along with that trend, we also saw the y/y change in the CPI follow suit to the downside. In the last couple of months, though, there has been a noticeable slowdown in the number of commodities falling in price, and as that pace slows we should see inflation readings level off and start to tick higher.
In this month’s ISM Manufacturing report, respondents noted price increases in three commodities and price declines in six. With a net reading of -3, this month’s level was actually a little more negative than last month (-2), but it is still well above the levels we saw in January when a net of 21 commodities were down in price! In the non-manufacturing sector, however, the net number of commodities rising in price has actually been rising for the last two months. In this month’s survey, respondents noted increases in the price of 12 commodities (down from 15 last month) and no price declines (compared to 9 last month). In fact, June marked the first month since May 2011 where no commodities in the ISM Non-Manufacturing report on business were down in price. On a net basis, 12 commodities were up in price, which was the highest monthly reading since last July. Another notable aspect of June’s ISM Non Manufacturing report was that Services Labor was noted as being in short supply for the fifth straight month. This could be an early warning of wage inflation, as labor shortages inevitably lead to higher wages.
The charts below show the rolling three-month net number of commodities rising in price in both the ISM Manufacturing and Non-Manufacturing reports. In each chart, we also compare those monthly readings to the y/y change in CPI. Looking at each chart, you can clearly see how the two series tend to track inflation. More recently, though, the disinflationary pressures of falling commodity prices that we saw in the last several months have abated, and barring another leg lower in commodities, could lead to some slight inflationary pressures down the road.