The HSBC Markit Purchasing Managers’ Index (PMI) – Composite for Manufacturing and Services – for October shows a continued contraction in the production index, at 47.5, from 46.1 in September. Anything above 50 is expansion, and below 50 is contraction.
On the bright side, the Services index which was 44.1 in September has gone up to 47.1. However, the headline number is still below 50, means it’s only falling at a lower pace.
What they say:
Anecdotal evidence indicated that worsening client confidence, economic instability, competitive pressures and the cyclone Phailin had all contributed to the latest drop in new work. For the second successive month, all six service sub-sectors posted lower new business volumes. The fastest decline was noted at Hotels & Restaurants.
Inflation rates in the Indian private sector rose during October, with input prices increasing at the quickest pace in 16 months and the rate of charge inflation climbing to a seven-month high. These were driven by faster increases in the goods-producing sector, as the rates of input and output price inflation were unchanged at services companies.
The problem is really inflation. It has now hit restaurant prices, which are sticky – you don’t reprint the menus and then try to lower prices again. The problem now is in the secondaries – and this was always the danger. If you will not control prices of the primary articles – vegetables, grains, metals etc. – by raising rates (and no, rates do have an impact in bring them down) then over some time the price increases will flow to the secondaries like restaurants and will not come down easily. Demand then will slacken, but will not bring down prices – the classic problem of stagflation.
We’re now at the beginning of the end-game of all this. Things will change over the next year, but I believe we will see some significant pain within that time as this piece unravels.