Dive Brief:
- Factory activity rose in March for the third consecutive month as a “big leap” in prices paid by manufacturers for inputs surged to the highest level since June 2022, the Institute for Supply Management said Wednesday.
- An index of prices jumped to 78.3% from 70.5% in February, the ISM said, citing a survey of manufacturers. More than two out of three (64%) comments from respondents were negative, with roughly 40% mentioning the Iran war and 20% referring to tariffs, according to Susan Spence, chair of ISM’s manufacturing business survey committee.
- The survey “marks the first report with panelists citing the Iran war as a new impact to their business, along with ongoing uncertainty with U.S. economic policy, despite the recent Supreme Court ruling striking down International Emergency Economic Powers Act tariffs,” Spence said in a statement.
Dive Insight:
Economists have warned about the risks of higher inflation since U.S. and Israeli warplanes launched attacks on Iran on Feb. 28.
Headline inflation will surge this year to 4.2%, or more than twice the Federal Reserve’s target, as the war pushes up energy costs, the Organization for Economic Cooperation and Development forecast on Thursday.
The Fed’s preferred measure of inflation — the personal consumption expenditures price index minus volatile energy and food prices — will likely end this year at 3.1%, Bank of America Securities analysts said Wednesday in a report. They previously forecast 2.8% so-called core PCE for 2026.
“The recent increases in energy prices will put upward pressure on headline inflation in the near term with some pass-through to core inflation,” St. Louis Fed President Alberto Musalem said Wednesday.
Futures for Brent crude oil, the global benchmark, have rocketed by about 44% since the Feb. 28 start of the war, from $70 per barrel to $101 per barrel.
Musalem noted that the U.S. Postal Service recently announced an 8% fuel surcharge on package deliveries. Also, an S&P Global survey in March indicated that companies were passing on higher energy prices to their customers and recording the biggest increase in selling prices since August 2022, he said.
Citing “geopolitical developments,” Musalem warned of “more risk of above-target inflation throughout 2026.”
Despite rising price pressures, Bank of America Securities analysts still expect the Fed to trim the main interest rate by 0.5 percentage point this year, but postpone their forecast for reductions from June and July to September and October.
At the same time, the analysts “acknowledge high risks that these cuts may not materialize."
Uncertainty from the Iran war and shifts in tariff policy has dimmed the outlook of many manufacturers even as they ramp up production, ISM said.
“Geopolitical tensions related to the conflict in Iran are contributing to rising manufacturing supply costs, and ongoing tariff uncertainty is negatively impacting purchasing strategies and cost forecasts,” an executive at a chemical manufacturer told ISM.
