Manufacturing PMI: Output price index rises to 40-month high
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The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for February came in at 50.7, up from January’s reading of 50.4. The numbers show that manufacturing companies are making a slow recovery from the impact of demonetisation, which temporarily sent the index to 49.6 in December. A reading below 50 indicates contraction from the previous month, while one above 50 signifies expansion.
The most important feature of the February manufacturing PMI, however, was the sharp rise in the output price index, which climbed to a 40-month high. The chart has the details.
The rise in prices was the result of higher input prices. Input price inflation quickened in February, with the rate of increase accelerating to the fastest in two-and-a-half years, and companies passed on this increase.
Pollyanna de Lima, an economist at IHS Markit, pointed to the slow pace of the recovery and added, “Of concern, higher commodity prices resulted in increased cost burdensfacing manufacturers. The sharp rate of inflation seen in February was the most pronounced in two-and-a-half years and led factory charges to be raised at the quickest pace in 40 months. This is likely to cause demand from price-sensitive consumers to fall and could potentially jeopardise the economic recovery.”
The rise in manufacturing output prices vindicates the Reserve Bank of India (RBI) monetary policy committee’s decision not to lower interest rates at its meeting held last month.
A recent International Monetary Fund staff report on India had advised, “Given medium-term upside risks to food and CPI (Consumer Price Index-based) inflation, the authorities should stand ready to raise the policy rate if inflationary pressures gather pace.”