Rising cost pressures starting to bug the euro area economy

Euro-area PMI data shows a divergence: manufacturing held up in April thanks to a surge in new orders (driven by frontloading amid price and supply concerns), while services are weakening on softer demand and fallout from the Middle East conflict. Input-price inflation is rising sharply — manufacturing input and output price measures hit multi-year highs — and supplier lead times have lengthened to their worst since July 2022. German firms are notably passing costs on to customers. The combination of rising price pressures and a deteriorating growth outlook raises stagflation risks and creates a policy dilemma for the ECB, increasing downside risk for the euro over the near term.