Core Summary

  • Data released by the Institute for Supply Management (ISM) on Wednesday showed that factory activity expanded for a third consecutive month in March, with manufacturers reporting a "sharp jump" in prices paid for inputs, reaching the highest level since June 2022.
  • The ISM, based on a survey of manufacturers, noted that the prices index jumped to 78.3% from 70.5% in February. More than two-thirds (64%) of respondents' comments were negative, with about 40% citing the Iran war and 20% citing tariffs, said Susan Spence, chair of the ISM Manufacturing Business Survey Committee.
  • Spence said in a statement that the survey "is the first report in which respondents cited the Iran war as a new factor affecting their business, while uncertainty in U.S. economic policy persists, despite a recent Supreme Court ruling that struck down tariffs imposed under the International Emergency Economic Powers Act."

In-Depth Analysis

Since U.S. and Israeli warplanes launched strikes on Iran on February 28, economists have been warning of the risk of rising inflation.

The Organisation for Economic Co-operation and Development (OECD) forecast on Thursday that overall inflation will surge to 4.2% this year due to the war pushing up energy costs, more than double the Federal Reserve's target level.

The Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index excluding volatile energy and food prices—could reach 3.1% by the end of this year, analysts at BofA Securities said in a report on Wednesday. Their previous forecast for so-called core PCE in 2026 was 2.8%.

"The recent rise in energy prices will put upward pressure on overall inflation in the near term and partially pass through to core inflation," St. Louis Fed President Alberto Musalem said on Wednesday.

Since the war broke out on February 28, global benchmark Brent crude oil futures have surged about 44%, from $70 per barrel to $101 per barrel.

Musalem noted that the U.S. Postal Service recently announced an 8% fuel surcharge on parcel deliveries. Additionally, a March S&P Global survey showed that companies are passing higher energy costs on to customers, with selling price increases the largest since August 2022, he said.

Citing "geopolitical developments," Musalem warned that "the risk of inflation running above target throughout 2026 is greater."

Despite rising price pressures, BofA Securities analysts still expect the Fed to cut its key interest rate by 0.5 percentage points this year, but they pushed back their expectations for rate cuts from June and July to September and October.

Meanwhile, analysts "acknowledge there is a high risk that these cuts may not materialize."

The ISM said that uncertainty stemming from the Iran war and shifting tariff policies has dampened confidence among many manufacturers, even as they increase production.

"Geopolitical tensions related to the conflict with Iran are driving up manufacturing supply costs, while ongoing tariff uncertainty is negatively impacting procurement strategies and cost forecasts," an executive at a chemical manufacturing company told the ISM.