By Jeffry Bartash, MarketWatch
American businesses are paying the most for raw materials since 2011 and a key price gauge just reached 2%, reflecting an upsurge in inflation that could hamper U.S. growth if it persists.
The latest evidence? The Institute for Supply Management said an index that tracks what manufacturers pay for supplies such as steel or lumber rose to the highest level in April in seven years.
A handful of business surveys from ISM and IHS Markit indicate companies are paying more for a variety of raw or partly finished goods. One of them is steel thanks to recently announced Trump administration tariffs on foreign imports.
“The recent steel tariffs have made it difficult to source material, and we have had to eliminate two products due to availability and cost of raw material,” an executive at a company that makes fabricated-metal products.
Just a day earlier, the government also reported that inflation as measured by the Federal Reserve’s preferred PCE index rose to a 12-month rate of 2% for the first time in a year. Just a few years ago the yearly rate was nearly zero.
Don’t expect much relief any time soon, either.
For one thing, the price of petroleum has risen sharply. Last month the cost of oil briefly topped $69 a barrel, heralding higher gasoline prices in the busy summer driving season. Airfares could also go up.
The strongest global economy in years is largely responsible for driving up demand for energy. OPEC is also trying to keep production down to prop up prices while bottlenecks in the U.S. are preventing drillers from producing as much oil and natural gas as they would like.
Oil isn’t the only commodity whose price is rising.
The cost of labor is another potential problem. An index that tracks worker compensation climbed in the first part of 2018 to the highest level since 2008.
Small businesses also say costs are rising, especially for labor. The number of small firms that say they are raising pay and benefits for workers climbed to the highest mark since 2000, the National Federation of Independent Business said.
If these trends remain intact, the PCE index will probably move toward 2.5% and compel the Fed to raise interest rates more aggressively in 2018. The central bank has been planning to lift its benchmark U.S. interest rate three times this year, but Wall Street increasingly thinks four rates are likely.
The benchmark rate, called fed funds rate, now ranges between 1.5% and 1.75%.