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August 26, 2016 - Weekly Pricing Pulse
The MPI has found a new higher trading range, with cost pressures beginning to seep into supply chains.
The IHS Materials Price Index (MPI) notched up its third consecutive increase last week. The headline measure grew by 2.4%, with most of the momentum once again coming from oil and chemicals. The oil subindex jumped 9.4%, coming close to its 2016 June peak. Since the end of June, the MPI has risen 11.4% and is now recording year-over-year increases for the first time since July 2014.
Despite their recent rally, it's worth stressing that oil prices remain volatile. Prices were weighed down early this summer by concerns over refined product oversupply and global (post-Brexit) macroeconomic fears. More recently, however, prices have recovered on the back of an announced informal OPEC meeting in September that could lead to a more hawkish stance by the cartel. Last week also saw a surprise dip in US crude stockpiles, which further helped to drive prices higher, with Brent crude moving briefly above $51/barrel. Notwithstanding all the recent market chatter, IHS does not expect an OPEC deal next month.
Apart from oil, dovish minutes from the most recent Federal Reserve meeting pushed the dollar lower and helped support commodity prices generally. More broadly, though, even if MPI growth slows down over the next few weeks, the index looks like it has found a higher trading range. More importantly, the rally in commodity prices since January has been strong enough and long enough to push downstream. Cost pressures, which have been absent in supply chains for the past two years, are slowly starting to build.