Is This the Beginning of the Second Wave of Inflation?

Companies can’t pass on those higher prices? What a bummer. But if they can without losing sales, it’s off to the races. See 2021/2022.

By Wolf Richter for WOLF STREET.

Nearly every subindex of today’s ISM Services PMI grew in February, and many accelerated further from the January pace of growth. Among those that accelerated further: The overall Services PMI and the indexes for employment, new orders, and prices.

And so, the services economy, which dominates the US economy, grew in February at a decent clip, according to the report.

The index that declined at an accelerating pace were imports. And that would be a good thing. Rising imports are a drag on GDP, and imports spiked in December and January in a historic way, according to Census Bureau data, as companies tried to front-run any tariffs to then charge higher prices amid tariff chaos for stuff they hadn’t paid any tariffs on? The profit motive at work.

But prices oh-la-la, with 16 of the 18 services industries reporting an increase in prices paid in February from January. The Prices Index, at 62.6%, was an acceleration of 2.2 percentage points from January, and the third month in a row – December, January, February – above 60, the first time that this occurred since March 2023.

The way these Purchasing Manager Indexes (PMIs) are structured, a value of 50 means no change, a value higher than 50 means growth, and a value below 50 means decline. The higher the value above 50, the faster the growth. The measurement is month-to-month.

In February, 32.4% of the respondents reported price increases from January, while 63% reported no price changes, and 4.6% reporting lower prices.

Here are the past four months. You can see the progression of the acceleration from November through February of those saying they paid higher prices:

And note: these are prices the companies paid, not prices they charged. Whether or not they can pass on those higher prices-paid is another story that we’ll get to in a moment.

But, but, but… the tariffs haven’t been implemented yet.

the new tariffs that are being bandied about, rescinded, paused, or renegotiated haven’t been implemented yet. And tariffs don’t apply to services at all, just imported goods if and when they’re finally implemented.

In the December Services PMI, which tracked prices changes from November, the Prices Index accelerated majestically to 64.4%, but Trump wasn’t even President yet.

So you can see what’s going on here: Companies love to raise prices, if they can without losing revenues, and now they feel they can. They feel emboldened to raise prices – which is precisely what triggered the 2021-2022 surge of inflation. Is this now the beginning of the second wave, and this time they’re blaming the still non-existent new tariffs?

Those prices will stick if businesses and consumers are willing to pay them. The chaos around the tariff threats, the media’s tariff clickbait that then goes viral, and corporate fearmongering on tariffs may be accomplishing this feat of getting businesses and consumers to accept higher prices and pay them willingly, thereby nurturing the second wave of inflation into existence.

Can’t pass on those higher prices? What a bummer.

Another US Services PMI released today, this one by S&P Global – which painted a “gloomier picture,” according to itself – also chimed in on rising prices, but added a different and more hopeful angle, that companies weren’t yet able to pass on most of those price increases and thereby ended up eating them:

“Cost inflation also picked up in February as suppliers raised prices, although competitive pressures meant that service providers increased their own charges only modestly.”

“A broad range of goods and services were reported to have risen in price during February, with suppliers in some cases increasing their charges due to [the not-implemented new] tariffs.

“Labor expenses were also reported to have increased.

“Overall, input cost inflation picked up in February to its highest level for four months and further above its long-term trend.

“However, efforts to pass on higher input costs to clients were somewhat limited by competitive pressures, weak market demand and market oversupply. This meant that prices charged rose only modestly overall in February.”

The report then commented further:

“Adding to the gloomier picture in February was a sharp rise in costs, which companies were often unable to pass on to customers due to weak demand. While this reduced pricing power is good news for inflation, it’s potentially bad news for profitability.”

What a bummer.

In search of “pricing power,” the holy grail in business.

Companies love to raise prices and try to do it all the time to see if they can without losing sales. Raising prices pushes up revenues if unit-sales don’t fall as a result of those higher prices. And if a company can raise its prices faster than its costs rise, its profit margins get fatter on top of the revenue increases. Wall Street is ecstatic about this stuff.

This “pricing power” is the holy grail in business. But what keeps companies from raising prices is competition that might not raise prices, so the price-raiser loses sales to that competition. Or customers sometimes refuse to buy and just don’t buy at all, not even from competition, and do without, when particular prices rise.

But in 2021 and 2022, companies suddenly could raise their prices without losing sales, and they were coordinating their price increases in public for all to see – because the media loves to turn this stuff into clickbait – by announcing their price increases so that their competitors could fall in line, and they did, which is why there was this spike of inflation in 2021 and 2022, accompanied by a huge surge in profits and profit margins. And now they again believe they can, and this coordination in public about higher prices has started all over again, and the media is turning it into clickbait all over again.

And they cite the tariffs. But the tariffs that are being talked about, rescinded, paused, and renegotiated haven’t been implemented yet. And tariffs don’t apply to services.

And yet, the common logic being used to explain to their customers why prices have been raised, companies blame the still not-implemented tariffs. It doesn’t matter what they blame. The idea is to raise prices and get away with it without losing sales. And they’re trying, and if their customers let them get away with it, this will turn into the second wave of inflation, even especially in services, which are never tariffed.

Fits right into what we’ve been seeing in the consumer price inflation data: Inflation has been going in the wrong direction for months, long before the tariff chaos even started. Read: Beneath the Skin of CPI Inflation: Worst Month-to-Month Acceleration of CPI since Aug 2023, on Spikes in Used Vehicles, Non-Housing Services, Food, Energy

Source: Wolfstreet.com

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