US Factory Inflation Surges on War Costs
While U.S. manufacturing output held steady in February, factory gate inflation has surged due to higher input costs for energy and commodities. The trend reflects the U.S.-Iran war's growing pressure on supply chains and is expected to continue if oil prices remain high.
The Institute for Supply Management's gauge of prices paid by manufacturers leaped to 70.5 in February, the highest level since inflation peaked in mid-2022. This reading, recorded before the most recent escalation, already signaled the fastest rise in input costs in nearly four years. The conflict has severely disrupted shipping through the Strait of Hormuz, a chokepoint for about 20% of the world's daily oil supply. In response, Brent crude oil prices surged, reaching as high as $83 a barrel after closing near $73 prior to the main escalation. Daily freight rates for liquefied natural gas (LNG) tankers have also jumped by over 40%. Even before the latest spike in oil, prices for unprocessed goods (excluding food and energy) rose over 15% in the year to January, the largest gain since April 2022. Prices for key industrial materials like steel and aluminum have been a primary driver of the cost increases manufacturers are facing. The combination of tariff impacts and war-related price shocks is complicating the Federal Reserve's path forward. Economists had anticipated potential interest rate cuts later in the year, but persistent inflation from supply chain pressures may now delay any such monetary easing.
