Reuters Events: US manufacturers can't shake that inflation feeling even as supply snarls ease

Techtronic Industries Co

18/05/2023 20:52

(Adds quote from Honeywell executive, headline tag)
    By Timothy Aeppel
       CHICAGO, May 18 (Reuters) - For Matthew Prange, it's
easy to see why the inflation surge of the last two years has
proven so difficult for the Federal Reserve to tame.
    "When prices go up, it tends to stick," said Prange, who
oversees $3 billion worth of purchases of electronic parts,
plastics, and metal as the top supply chain manager at Milwaukee
Tool, a venerable Wisconsin toolmaker owned by Hong Kong-based
Techtronic Industries Co.
    The view among economists during the COVID-19 pandemic was
that the burst of inflation was an inevitable result of the
sudden increase in demand for goods by people stuck at home with
plenty to spend. Global supply chains grew overwhelmed as they
struggled to deliver.
    But Prange said most of his supply chain had stabilized -
meaning he was able to get most of what he needed - by the end
of 2021. And yet the outsized price increases kept coming and,
in some cases, he said, continue today.
    Milwaukee Tool is among the companies, including Cummins Inc
and Schneider Electric, gathered in Chicago this week at a
Reuters Events supply chain conference. They described what they
view as the slow and uneven decline of inflation, with some of
them seeing the pace of price increases ease in one part of
their business but continue to surge in others.
    "One of the headwinds is inflation," said Kevin Austin, the
supply chain chief for Toyota Motor North America. He attributed
the price pressures in part to pent-up demand, which remains
strong in the auto industry even as the economy has slowed.
    Inflation has fallen as the Fed has raised its benchmark
overnight interest rate by 5 percentage points over the last 14
months - the fastest pace of rate hikes in four decades. The
annual increase in U.S. consumer prices slowed to below 5% in
April for the first time in two years. 
    Still, that and other measures of inflation tracked by the
Fed remain well above the U.S. central bank's 2% target. Data
from the Philadelphia Fed on Thursday showed the path to lower
inflation remains uneven: its monthly index of prices paid by
manufacturers in its region rose for the second time in the past
four months.
    Meanwhile, the global supply chain snarls of the pandemic
have diminished. The New York Fed's Global Supply Chain Pressure
Index ticked down to a reading of -1.32 in April, compared to a
revised -1.15 in March. Negative readings point to pressures
that are below the historical average.
    "There’s still dislocation in global supply chains," said
George Koutsaftes, president and CEO of Honeywell Safety and
Productivity Solutions.
        But inflation pressures have moderated, he said. "And as
we look 12 to 18 months out, we see it moderating even further."
  
        The challenge now is that factors that emerged in the
pandemic have become endemic, Koutsaftes said. Labor shortages
continue, for instance, and the rush to regionalize supply
chains has increased demand for commodities in many parts of the
world.
  
    
    NOT A UNIFORM PICTURE
    Economists attribute the persistence of relatively high
inflation to factors beyond strained supply chains. The risks of
long global pipelines for goods, which were highlighted by the
pandemic, and growing geopolitical tensions - the war in Ukraine
and a souring U.S.-China relationship - have sparked a rush to
move production closer to end markets. Those new factories,
however, are costly to build and the goods they produce come at
a higher price. 
    Ken Engel, who manages the North American supply chain for
Schneider Electric  SCHN.PA , a French electrical equipment
maker, said he noticed a shift in attitude among customers over
the last six months. He no longer hears from people desperate to
find goods. Instead, they are asking when they will see lower
prices.
    But the picture is not uniform. "It differs by business,"
Engel said. For instance, Schneider makes small circuit breakers
widely used in residential construction, which has slowed under
the weight of higher interest rates. By contrast, demand for the
company's "engineered-to-order" electrical parts to build data
centers continues to boom.
    "For the cloud providers" building those massive data
centers, he said, "there's been no slowdown."
    Much like Milwaukee Tool, Engel said Schneider's North
American factories have largely recovered from the shortages of
the last few years. But supplies can still be spotty, which
often means paying more for those scarce items.
    "Our problem is our upstream suppliers," such as firms that
mold plastic parts, Engel said. In many cases, those suppliers
have all the materials and machinery they need but lack the
labor to produce enough to meet orders, he said.
    Mario Guerendo, who oversees the global supply chain for
Cummins  CMI.N , said one bright spot for the Columbus,
Indiana-based engine maker has been rapidly falling shipping and
logistics costs.
    "It was crazy during COVID," he said.
    And yet, the same thing is not happening with many of the
raw materials that the company buys. Steel prices, for instance,
have eased but remain well above pre-pandemic levels. 
    "We're also seeing it vary depending on geography," he said.

 (Reporting by Timothy Aeppel;
Editing by Dan Burns and Paul Simao)
 ((Tim.Aeppel@thomsonreuters.com;))