Manufacturing is still growing, but danger is building underneath. The ISM Prices Paid Index hit 78.3 in March - the highest level since mid-2022, when prices were out of control.

This is the stagflation trap: factories keep making stuff while costs spike. One part works fine, the other part burns hot.

Costs Jumped in One Month

February: 70.5. March: 78.3. That's a 19-point jump that signals a shock just hit factories. Seventeen of 18 industries faced higher costs. The reason? Oil near $120 per barrel.

Oil runs everything - trucks, plastic, chemicals, packaging. When oil spikes, factory costs follow. ISM Chair Susan Spence said demand is "going in the wrong direction" - code for: growth might be peaking.

Prices Rising Faster Than Hoped

Price growth could hit 4.2% according to new forecasts. The Fed's favorite measure (Core PCE) could reach 3.1% by year-end. Markets now expect no Fed rate cuts all year - no moves up or down.

Bank of America moved their rate cut forecast back from June-July to September-October. The problem is tariffs won't fully hit prices until summer when companies pass costs along.

What to Watch

The real test: Can factories raise prices or will buyers just buy less? If factories keep running but sales flatten, profit margins get crushed. That's stagflation - slower sales, higher costs, lower profits.

It hurts stocks and bonds at the same time. Next earnings season shows if factories can still sell at higher prices or if customers are done.