US Factory Inflation Surges Unexpectedly
US manufacturing activity held steady in February, but factory gate inflation surged to its highest level since the pandemic. The spike is being driven by higher energy prices and supply chain disruptions, threatening profit margins even as factory output remains robust.
The Institute for Supply Management's (ISM) index for prices paid by manufacturers surged 11.5 points to 70.5 in February. This represents the highest reading for input costs since June 2022. This data largely reflects costs before recent U.S. and Israeli airstrikes in Iran, which have since disrupted oil tanker traffic in the Strait of Hormuz and caused crude prices to jump sharply. The conflict presents a new challenge to what had been a nascent recovery for the manufacturing sector. Ongoing tariffs on imported goods, particularly steel and aluminum, continue to be a primary driver of high costs for American producers. Some manufacturers report that these trade policies are raising prices while simultaneously lowering demand and profitability. Supply chains are showing other signs of strain, with supplier delivery times lengthening for the third consecutive month. A measure of order backlogs also jumped 5 points to its highest level since May 2022, indicating mounting demand pressure. The expansion in manufacturing activity is not uniform across all sectors. Twelve industries reported growth in February, led by textile mills and primary metals, while five industries, including furniture and apparel, contracted. The surge in producer prices is stoking fears of a broader inflation resurgence, making it less likely the Federal Reserve will implement interest rate cuts in the near future. Financial markets are now pricing in a higher probability that the central bank will hold rates steady at its March meeting.
