US factory input costs surge on Iran, tariffs and AI demand

US manufacturers are contending with a fresh burst of supply chain cost inflation as the conflict with Iran pushes up energy prices, tariffs raise the cost of imported inputs, and the artificial intelligence boom strains supplies of critical electronic components. Industry data and executive accounts show that raw material, energy, and freight costs are climbing at a pace not seen in years, with some input prices rising at double-digit rates. The pressure is forcing factories to pass along higher costs, threatening to feed through to consumer prices and complicating the Federal Reserve’s path on interest rates.

The August survey from the Institute for Supply Management found that more than a dozen manufacturing industries reported rising raw material costs, with none reporting declines. The ISM’s overall price index has climbed steadily since the start of 2026 and has now shown rising costs for 23 consecutive months. Production managers have flagged increases in petroleum-based products, steel, and aluminum. The pattern is consistent across the supply chain. Bureau of Labor Statistics data show that prices for finished goods rose 6.6 percent year on year in August, but the cost of intermediate processed goods jumped 11.5 percent and unprocessed goods such as scrap metal rose 12.8 percent. Diesel fuel, a key input for freight, has been a particular driver, with pump prices reaching a record $6.23 a gallon this week, according to AAA. Freight costs have also surged, with the average cost per shipment up 16 percent in August from a year earlier.

The effect on individual manufacturers is tangible. Julie Robbins, chief executive of EarthQuaker Devices, an Ohio-based guitar pedal maker, said the company has had to raise prices twice this year. “We just need to spend more and more money for the same stuff,” she said. “It feels like we have to try twice as hard to get the same results.” Zac Rogers, a professor of supply chain management at Colorado State University, described the dynamic in starker terms: “Supply chains are paying more for less inventory. The bang for the buck in the supply chain keeps getting worse and worse.”

The inflation is becoming a political liability for the administration. At the Republican National Convention in Dallas last week, President Donald Trump claimed he was “bringing the prices way down, way, way down,” a statement at odds with the data now emerging from the factory sector. The bond market has taken notice. The yield on the 10-year Treasury touched 5 percent this week for the first time since 2023, and traders are now pricing in a real possibility that the Federal Reserve will raise rates at its next meeting, a stark reversal from the easing cycle that many had expected.

The deeper question is whether these pressures are transitory or structural. The conflict with Iran has introduced a geopolitical risk premium into energy markets, and tariffs are a deliberate policy choice that raises the cost of imported goods. But the AI boom is a different kind of force. The race to build data centers has created concentrated demand for semiconductors and other electronics, tightening supply in ways that are unlikely to resolve quickly. This suggests that even if geopolitical tensions ease or trade policy shifts, a portion of the cost pressure may be embedded in the system for some time.

For manufacturers, the calculus is unenviable. They can absorb higher input costs, which squeezes margins, or pass them along, which risks alienating customers and feeding the very inflation that is now shaping monetary policy. The data point in one direction: input costs are rising faster than output prices, and that spread is likely to narrow only when supply chains become more efficient or demand cools. Neither appears imminent. The near-term outlook is for continued pressure, and the policy choices made in Washington in the coming months will determine whether this remains a supply-side shock or becomes a broader wage-price spiral. The takeaway for investors and policymakers is that the era of cheap, frictionless supply chains is over, and the costs of that shift are only beginning to be counted.