Booming business across Europe is fueling inflationary pressure

Businesses across Europe are seeing the biggest increases in orders and activity for many years, leading to growing supply shortages and driving up prices, according to a closely watched survey.

Business activity in the euro zone expanded at the fastest rate in 15 years in June after lockdown measures were lifted, while business activity in the UK also remained buoyant, according to the IHS Markit Purchasing Managers’ Index published on Wednesday.

Eurozone PMI from IHS Markit the flower to 59.2 in June, up from 57.1 in May, the highest level since June 2006 and well above most economists’ expectations. The 50-plus reading indicates that the majority of companies reported expansion from the previous month.

The German PMI hit a decade high at 60.4, while the French PMI rose to 57.1. The UK provisional PMI was 61.7, below May’s record of 62.9, but among the highest since the series began in 1998.

Survey results suggest that major economies in Europe will post a strong rebound in the second quarter from historical contractions caused by the pandemic over the past year. They confirmed recent readings high frequency data It shows that consumers in Europe are once again flocking to bars and restaurants, booking holidays and commuting to work again.

“The [eurozone PMI] The data sets the scene for an impressive expansion of [gross domestic product] “In the second quarter, stronger growth will follow in the third,” said Chris Williamson, chief business economist at IHS Markit.

“It’s a boom time for business in the eurozone, even if it’s not the level of PMIs that matters but the direction,” said Nadia Gharbi, economist at Pictet Wealth Management.

However, rising inflationary pressures became an even bigger problem as manufacturing and service companies said they were passing higher input costs to customers at an unprecedented rate.

IHS Markit said companies in the eurozone posted the largest increase in backlog since data collection began in 2002, as supply problems spread from manufacturing to the service sector, where backlogs rose at the fastest rate in more than 20 years.

A similar picture was in the UK, where input cost inflation rose for the fifth consecutive month, equaling its previous highest pace ever, and output price inflation touched an all-time high for the second month in a row.

Williamson predicted “more upward pressure on inflation in the coming months,” adding that many companies “are struggling to meet demand, and are running short of raw materials and staff.”

Inflation has already exceeded the targets of both the European Central Bank and the Bank of England, at 2 per cent in the eurozone and above that in the UK. But both central banks said they expect price pressures to be temporary and to subside next year.

IHS Markit reported that service firms in the bloc reported a particularly strong rebound in activity and “rising supplier prices, increased fuel and transportation costs, as well as rising wage pressures”. Prices of goods and services “rose at an unprecedented rate”.

But in Germany there were indications that supply chain problems could be easing after a “slight decrease in the number of companies reporting longer lead times for materials and components”.

According to an IHS Markit survey, the rapid expansion of activity prompted UK firms to hire workers at the fastest rate in the history of the data series, while eurozone firms added additional staff at the highest rate since August 2018.

“Labour demand suddenly shot up as large parts of the economy opened up all at once, and that wasn’t an easy process at all,” said Jack Allen-Reynolds, an economist at Capital Economics.

Express PMI surveys are published about 10 days before the final PMIs, and typically include about 80 percent of total responses.

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