Inflation is being left on the shelf.

The ISM Manufacturing Price Paid Index is a leading indicator.

The overnight release of the July 2022 data shows the index falling 24% from the previous month.

It reflects a change in prices paid by industry representatives for the products or services they receive.

It’s a monthly survey of supply managers from 18 U.S. industries where respondents estimate prices paid in the production process: whether they have grown, fallen or have not changed.

In my recent posts, I’ve been highlighting the decline in commodity prices is/will lead to lower input prices,

along with rising inventories resulting in discounted prices of existing, finished products

and how that will result in the moderating of inflation and interest rates. Not a collapse but simply an abatement.

Throughout my 2022 presentations, I have mentioned the idea of how ‘inflation can be left on the shelf’.

In this February 18, 2022 note,

I wrote,

“It’s also the start of an odd period where higher prices of finished goods (due to the higher price paid by buyers of raw/base/industrial commodities) may be left on the shelf.

Rising prices have been evident but we can’t assume that higher prices are automatically paid for.”

So there is your picture.

Prices rose to a point where buyers walk away and when they saw producers scrambling to secure materials, one can predict that inventories will rise.

Now that material prices have fallen by 30% or more, buyers can source product from those who have acquired (and worked) their materials at the current lower prices.

Additionally, those higher priced inventories will eventually need to be discounted in order to generate cashflow and reduce their stock which is tying up working capital.

And thus survey respondents are either buying product at cheaper prices than earlier in the year or can expect lower prices in the near future.

August 2, 2022

by Rob Zdravevski

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