February 1, 2011 / 6:26 PM / 9 years ago

GLOBAL ECONOMY - Manufacturing surveys find seeds of inflation

NEW YORK/LONDON (Reuters) - Costs to manufacturers are rising around the world, data showed on Tuesday, the latest evidence of growing inflation pressure from commodity prices as the global recovery gathers speed.

Vendors sell vegetables at a wholesale vegetable market in Chandigarh January 17, 2011. REUTERS/Ajay Verma/Files

Inflation has hurtled to the top of the policy agenda in emerging markets and in Europe. But in the United States rising commodity prices are unlikely to lead to higher consumer prices and prompt the Federal Reserve to drop its easy-money policy.

Rising food and fuel prices have hit poorer countries and are one of the factors behind massive anti-government protests in Egypt and in Tunisia.

In the United States, the manufacturing sector grew at its fastest pace in nearly seven years, and an index of prices paid — which represents business sentiment of future inflation — rose to the highest level since July 2008. “There’s some emerging price pressure at the raw material level, but given the fact that fundamentals in the U.S. economy suggest a moderate rebound, the ability of firms to pass on those prices to consumers is limited,” said Michael Hanson, senior economist at BofA Merrill Lynch Global Research in New York.

The reluctance of many firms to pass on higher costs are crimping some U.S. corporate profits. For example, Emerson Electric Co, which makes automation equipment for factories, reported results on Tuesday that fell short of expectations, partly because of higher costs of raw material such as copper used in cables and wires.

GRAPHICS on Global inflation, click r.reuters.com/wuz46r

Asian PMIs, click link.reuters.com/saq77r

China's CPI, PPI, click link.reuters.com/syh37r

Purchasing managers’ indexes (PMIs) in Europe suggested firms have managed to pass on some of their increased costs to customers there.

For the 17-nation euro zone bloc, the PMI input price gauge jumped to its highest level since the survey began in 1997. In Britain there was substantial growth in both input costs and factory gate prices.

Euro zone consumer prices rose 2.4 percent in January, well above the European Central Bank’s preferred 2 percent ceiling, data showed on Monday. British inflation rose to 3.7 percent in December, almost twice the Bank of England’s target.

The ECB is expected to leave rates on hold at a record low of 1.0 percent on Thursday. But there is growing speculation that it will act sooner rather than later to quell rising prices.

The euro zone’s manufacturing activity overall accelerated in January more than previously thought to its highest level since April.

In China, input costs for manufacturers also rebounded in January, according to the official PMI. The comparable input price index for India rose for a seventh straight month, while factory gate prices were up for the fourth month in a row.

“This provides a further reason to think that headline inflation is likely to pick up in the next few months,” said Brian Jackson, economist at Royal Bank of Canada in Hong Kong.

China’s official PMI fell to a five-month low in January, the China Federation of Logistics and Purchasing said. Analysts warned the results were likely distorted by a closure of factories ahead of China’s Lunar New Year.

A separate PMI sponsored by HSBC pointed in the opposite direction, edging up in January and with a slight easing in input price inflation.

Taken together, the two surveys painted a picture of sticky inflation and a moderate slowdown in the world’s second-largest economy after 10.3 percent growth last year, which was generating an inflation rate of 4.6 percent in December.

“This will only reinforce the overriding theme of policy tightening to contain inflationary pressures,” said Charlie Lay, economist at Forecast PTE in Singapore.

So far, Chinese officials have moved tentatively on interest rates and the currency, and instead leaned heavily on administrative measures, raising banks’ reserve requirements seven times since the start of last year and capping their lending, while also cracking down on property speculation.

(Additional reporting by Aileen Wang in Beijing, Yati Himatsingka in Bangalore, Kevin Yao and Yoo Choonsik in Seoul; Simon Rabinovitch in Beijing; Editing by Ken Wills and Vidya Ranganathan; editing by Patrick Graham and Padraic Cassidy)

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