What's Driving Rising Business Costs?
Source: Hacker News
After a period of moderating cost increases, businesses faced mounting cost pressures in 2025. While tariffs played a role in driving up the costs of many inputs—especially among manufacturers—they represent only part of the story. Indeed, firms grappled with substantial cost increases across many categories in the past year.
This post is the first in a three‑part series analyzing cost and price dynamics among businesses in the New York‑Northern New Jersey region based on data collected through our regional business surveys. Firms reported that the sharpest cost increases over the past year were for employee health insurance and utilities, followed by business insurance, and goods‑and‑materials inputs. Firms expect cost growth to moderate in 2026.
- Our second post will examine the sharp increase in employee health‑insurance costs in more detail and show that such rising costs dampened wage growth for some workers.
- The third post will analyze firms’ pricing behavior in light of these cost pressures, as well as firms’ inflation expectations.
After Slowing, Cost Increases Picked Up Noticeably Last Year
As shown in the chart below, businesses reported that the pace of cost increases picked up significantly in 2025 compared to the previous two years, especially among manufacturers. Cost increases were about 5 % in 2024 (average across both firm types). In 2025, costs rose by 7 % among service firms (an increase of 1.7 percentage points) and 8.5 % among manufacturers (an increase of 3.6 percentage points). These increases were meaningfully higher than what was expected last year, when service firms predicted a nearly 6 % rise and manufacturers expected about 7 %.
Cost Increases Picked Up Noticeably in 2025, But Are Expected to Moderate
Source: New York Fed Regional Business Surveys – December 2025, February 2025, February 2024, December 2022.
Note: These averages represent a trimmed mean; the highest 5 % and the lowest 5 % of responses are excluded.
Sharp Increases in the Cost of Insurance and Utilities
We asked firms for their estimates of cost increases for several input categories over the past twelve months. Average increases are shown in the chart below. Notably, cost increases were generally larger among manufacturers than service firms.
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Employee health insurance – the biggest increase:
- Manufacturers: 14.2 %
- Service firms: 12.9 %
Some firms reported spikes of 25 %–50 % when they renewed coverage.
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Utilities – the next largest increase: 8.5 % for both firm types. About 15 % of respondents reported utility hikes of 20 % or more. These spikes have been tied to the explosive growth of AI‑related data centers:
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Business insurance (liability, property, auto, workers’ compensation, etc.) – average increase:
- Service firms: 7 %
- Manufacturers: 7.5 %
Roughly 1 in 10 firms reported insurance hikes of 20 % or more.
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Wages – modest increase of 3.4 %.
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Rent – relatively small increase of about 2 %.
Insurance and Utilities Saw Largest Cost Increase Over Past Year
| Input Category | Service Firms | Manufacturers |
|---|---|---|
| Employee health insurance | 12.9 % | 14.2 % |
| Utilities | 8.5 % | 8.5 % |
| Business insurance | 7 % | 7.5 % |
| Goods & materials | 5.5 % | 8 % |
| Wage growth | 3.4 % | 3.4 % |
| Rent | 2 % | 2 % |
Source: New York Fed, Regional Business Surveys, February 2026.
Note: These averages represent a trimmed mean; the highest 5 % and the lowest 5 % of responses are excluded.
Goods and Materials Costs
Goods and materials costs climbed by 8 % on average among manufacturers, versus a still‑significant 5.5 % increase among service firms. Greater exposure to tariffs may explain why manufacturing firms faced a sharper rise. Several firms reported substantial cost hikes for tariff‑affected inputs such as aluminum, steel, equipment, electrical supplies, and auto parts.
Looking Ahead
As shown in the first chart, cost increases are expected to slow to 5.4 % for service firms and 4.8 % for manufacturers in 2026—a decline from 2025, and a pace similar to what was reported in 2024. Still, these are significant cost increases for many businesses to manage.
Our second post will examine the sharp rise in employee health‑insurance costs and the effects it has had on the wages firms pay, and our third post will analyze firms’ pricing behavior and inflation expectations.
Authors
Jaison R. Abel – Head of Microeconomics, Federal Reserve Bank of New York, Research and Statistics Group
Richard Deitz – Economic Policy Advisor, Federal Reserve Bank of New York, Research and Statistics Group
Nick Montalbano – Data Analytics Specialist, Federal Reserve Bank of New York, Research and Statistics Group
How to Cite This Post
Jaison R. Abel, Richard Deitz, and Nick Montalbano, “What’s Driving Rising Business Costs?,” Federal Reserve Bank of New York Liberty Street Economics, March 4, 2026, https://doi.org/10.59576/lse.20260304a
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Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).