Factory prices surge back to Iran-war levels as ISM holds at 54.5

American factories kept expanding in September while the prices they pay for inputs surged to their highest since the start of the Iran war, the Institute for Supply Management reported Thursday -- a combination that complicates the market's post-PCE dovish tilt.

A steady headline, a hot prices index

The manufacturing PMI dipped to 54.5 from 54.6 in August, missing the 55.0 consensus of economists polled by Reuters, but holding above 50 for a ninth straight month. New orders rose 1.6 points to 55.3, order backlogs jumped 4.6 points to 56.4, and employment picked up 1.5 points to 52.7. Production eased to 56.7 and the supplier deliveries index to 59.0 -- a reading above 50 means slower deliveries, and strong demand kept straining supply chains. The overall economy has now been in expansion for 23 straight months, ISM said.

The prices-paid spike

The number that will dominate the rate debate is prices paid: 77.9, up 6.8 percentage points from 71.1 in August -- back to the level at the start of the Iran war, ISM said. "The most recent surge in price growth has renewed my concern about price volatility," Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said on a media call Thursday. "Trade wars, chaos, whatever you care to call it, is really what's affecting inflation." The index has now been in expansion -- "increasing" territory -- for 24 months, and Reuters noted the jump is consistent with expectations that inflation could stay above the Federal Reserve's 2 percent target for some time.

What's straining the factory gate

Demand is the engine and the pressure at once. An AI infrastructure buildout is supporting manufacturing, Reuters reported, along with businesses rebuilding inventories to meet robust domestic demand. Diesel prices are at record highs, and economists say the economy could soon feel the effects. The sentiment split is telling: 40 percent of manufacturer comments were positive and 60 percent negative; among the negative, pricing volatility was cited in 46 percent, tariffs in 34 percent, the Iran war in 30 percent, and longer lead times in 21 percent. Five of the six largest manufacturing industries expanded -- computer and electronic products, food and beverage, transportation equipment, machinery, and chemical products. S&P Global's competing manufacturing PMI came in at 55.9, its strongest since May 2022.

The rate read-through

The print lands on a market that just pivoted dovish. After inflation revisions suggested the July-August scare was less threatening than feared, investors scaled back bets on another hike this month -- but the September data reopens the question. The Fed raised rates 25 basis points in September to 3.75-4.00 percent, its first hike in three years, and flagged more to come. The factory-gate surge is a hawkish counter-read to the post-PCE easing tilt, and October-hike odds held roughly steady in the immediate reaction. Watch Friday: the September jobs report and eurozone inflation data arrive within hours of each other -- the next two votes in the hike debate.