Interpreting PMI data
An explanation of the inter-relationships of selected economic indexes from the PMI surveys.
Typical 'boom-bust' cycle’
It helps to first consider a typical pattern of events in a classic “boom-bust” business cycle. During a period of economic expansion, it is common place for employment to rise, unemployment to fall and the demand for raw materials to increase. If employment and demand for raw materials rise at suitably fast rates, it is then common for skill shortages and supply-chain bottlenecks to develop.
When demand exceeds supply, prices tend to rise. Wages and salaries and raw material prices will therefore begin to increase. Retail price inflation may then pick up as higher costs are passed on to the consumer.
The current economic policy prescription for rising high street inflation is an increase in central bank base rates which, by raising borrowing costs to business and the consumer, restrains demand. Prices and economic growth then tend to grow at slower rates. When demand has slowed sufficiently, interest rates may be lowered again, thus stimulating economic growth.
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