Energy price surge and supply chain delays drive up manufacturing costs

Inflationary pressure in the manufacturing sector hit record levels last month as supply chain delays and surging energy prices continued to push up costs.

AIB’s latest purchasing managers’ index (PMI) for the manufacturing sector here said average input prices increased more than in any month in the 23-year history of the survey, with more than three-quarters of firms reporting increases since September.

Anecdotal evidence linked higher costs to a wide range of raw materials, transport charges, gas prices and Brexit-related issues.

The report noted that production remained constrained by supply delays “with lead times lengthening the most in any month on record”.

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Subsequently, rates of input and output price inflation both reached new survey highs in October, AIB said. Headline inflation in the Irish economy rose to a 13-year high of 3.7 per cent in September as the cost of energy soared.

The European Central Bank insists the current rise in inflation will be transitory but others argue the uptick might be more long lasting.

Despite the cost pressures, the PMI report shows that overall activity in the manufacturing sector here accelerated again last month as firms received new orders and addressed backlogs.

The main index rose to 62.1 in October, up from 60.3 in September. Any figure above 50 signifies an expansion in activity.

The monthly uptick was the fifth-highest on record. The main index has now registered above 60 for seven months running, having never previously passed that threshold.

Protect operations

The sub-index for new work rose sharply in October, as markets continued to reopen and customers placed advance orders to protect operations against delivery delays.

The overall rate of new business growth was also sharp and well above the long-run survey average, but the weakest since March, reflecting what AIB said was only a modest rise in new export orders.

"The AIB Irish manufacturing PMI for October registered another month of robust performance," AIB chief economist Oliver Mangan said, noting that the seven-month run above 60 illustrated the very solid rebound in manufacturing this year.

“Firms noted the higher level of production was against a backdrop of rising demand as the economy continued to reopen and attempts to clear backlogs,” he said.

Mr Mangan also highlighted that the sub-index for suppliers’ delivery time deteriorated to a new record level, reflecting unprecedented supply chain delays.

“This combination of supply delays and higher energy prices brought further upward pressure on both input and output prices,” he said. “Notably, the pass through of increasing input costs to end products saw the output cost index rise at its fastest pace on record,” Mr Mangan said.