US Factory Inflation Surges on War-Driven Costs
U.S. manufacturing activity held steady in February, but factory gate inflation has surged significantly. The spike is being driven by rising input costs for oil, metals, and shipping, which are linked to the escalating conflict in the Middle East. This trend threatens to increase pressure on corporate margins and eventually flow through to consumer prices.
The Institute for Supply Management's prices-paid index soared to 70.5 in February, a sharp 11.5-point jump from January and the highest reading since June 2022. This measure of input costs for factories indicates a broad-based pressure on manufacturers even before the full impact of the recent oil price shock. The conflict that erupted after U.S. and Israeli military strikes in Iran on February 28 has effectively halted tanker traffic through the Strait of Hormuz. This critical chokepoint normally sees about 20% of the world's daily petroleum consumption pass through it. Following the attacks, Brent crude futures, the international benchmark, briefly jumped by as much as 13%, rising above $82 a barrel. U.S. crude futures saw a similar spike of up to 11%. Shipping costs have also escalated dramatically, with war-risk premiums adding as much as $1500 for a standard shipping container. Beyond oil, manufacturers are also contending with persistently high metal prices. In the year leading up to January, the costs for steel and aluminum products had already climbed 20.7% and 33%, respectively. These increases are linked to ongoing tariffs that affect acquisition costs and sourcing decisions for many U.S. producers. This surge in producer prices is already influencing monetary policy expectations. Economists suggest the persistent price pressures, now intensified by the conflict, make it less likely that the Federal Reserve will cut interest rates in the near future. The manufacturing sector itself had only recently emerged from a 10-month period of contraction, with the ISM's overall manufacturing index registering a 52.4 in February, indicating slight expansion. However, the sharp rise in input costs now threatens to temper this nascent recovery.
