After two years of moderating cost increases, businesses faced mounting cost pressures in 2025, with manufacturers experiencing an 8.5% rise and service firms seeing a 7% increase. The New York Fed's regional business surveys reveal that cost growth picked up significantly compared to 2024, when increases averaged around 5%. Tariffs played a role but represent only part of the story.

Health insurance emerged as the largest cost driver, climbing 14.2% for manufacturers and 12.9% for service firms. Utilities followed closely at 8.5% increases for both sectors, with some firms reporting 20-50% spikes tied to AI data center growth. Business insurance rose 7-7.5%, while goods and materials costs jumped 8% for manufacturers versus 5.5% for service firms, suggesting tariff exposure contributed to the disparity.

Looking forward, businesses expect cost growth to moderate to 5.4% for service firms and 4.8% for manufacturers in 2026. However, these remain significant increases that many businesses must manage. The New York Fed's three-part series will examine health insurance's impact on wage growth and analyze pricing behavior in light of these cost pressures.