Nothing is so painful to the human mind as a great and sudden change. — Mary Shelley
Nothing is so painful to the human mind as a great and sudden change.
The ISM Manufacturing Prices Paid Index rose 19.3 points over two months in March, marking one of the largest increases in the history of the series. The change ranks in the top 2% of two-month observations since 1948 and has occurred only a handful of times over more than seven decades. This change implies a much larger share of firms are reporting higher input costs than two months ago. Moves of this size are rare and tend to draw attention because of how quickly prices change.
But what does this surge imply for investors? The move reflects a change in direction and points to cost pressures building again across the manufacturing sector.
The historical relationship between ISM Prices Paid and downstream inflation offers some context. Periods that fall into the top decile of two-month increases have often tended to be followed by firmer goods inflation. For example, the core goods Consumer Price Index has averaged roughly 2.04% on an annualized basis in the three months following these spikes, compared with about 1.29% in the three months prior. Goods inflation has tended to run hotter after large increases in ISM Manufacturing Prices Paid, indicating that upstream cost pressures translate into pass-through pricing.
The ISM’s own report points to several forces behind the latest move. It highlights higher steel and aluminum prices, tariffs on imported goods and rising petroleum-based inputs tied to the Middle East conflict. Supplier deliveries have slowed, indicating renewed friction in supply chains, while a majority of firms reported paying higher prices across industries. The combination points to a broader escalation in cost pressures across the manufacturing sector.
The size of the increase stands out historically, and past episodes suggest that similar changes have been associated with a pickup in goods inflation, even if the overall level remains below extremes. This does not determine the path of inflation on its own, but it points to building cost pressures within the production process. Higher potential inflation complicates the Federal Reserve’s policy path, reinforcing a more cautious stance as policymakers assess whether these cost pressures prove persistent. Markets often focus on the level of inflation, while changes in direction can provide earlier insight into what comes next. The recent surge in ISM Prices Paid reflects how quickly prices are rising, and that shift in direction is what matters.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
