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. Indeed, cost increases were reported to be about 5 percent in 2024, on average, among both types of firms in our surveys. However, costs rose by about 7 percent among service firms in 2025—an increase of 1.7 percentage points—and by 8.5 percent among manufacturers—an increase of 3.6 percentage points. These increases were meaningfully higher than what was expected last year, when service firms predicted 2025 would bring a nearly 6 percent increase and manufacturers expected about a 7 percent increase.
Cost Increases Picked Up Noticeably in 2025, But Are Expected to Moderate
Note: These averages represent a trimmed mean; the highest 5 percent and the lowest 5 percent of responses are excluded.
Sharp Increases in the Cost of Insurance and Utilities
We asked firms for their estimates of cost increases for several categories of inputs over the past twelve months, with average increases shown in the chart below. Notably, cost increases were generally larger among manufacturers than service firms. The largest increase by a wide margin was for employee health insurance, which saw an average increase of 14.2 percent among manufacturers and 12.9 percent for service firms. Though not common, some firms reported increases of between 25 percent and 50 percent when they renewed their coverage.
The next largest cost increase was for utilities, which climbed by 8.5 percent over the past year for both types of firms, with about 15 percent of all respondents reporting increases of 20 percent or more. Indeed, sharply rising utilities costs in some areas have been tied to the explosive growth of AI-related data centers. Business insurance—which includes liability, property, auto, and workers’ compensation, among other things—climbed by about 7 percent, on average, for service firms and by 7.5 percent for manufacturers. Here too, a significant number of firms reported large increases—close to one in ten reported business insurance hikes of 20 percent or more. At the other end of the spectrum, wage increases came in at a more modest 3.4 percent and rent increases were relatively small, at around 2 percent.
Insurance and Utilities Saw Largest Cost Increase over Past Year
Note: These averages represent a trimmed mean; the highest 5 percent and the lowest
5 percent of responses are excluded.
Of note, goods and materials costs climbed by 8 percent, on average, among manufacturers, but rose by a more modest yet still significant 5.5 percent among service firms. A greater exposure to tariffs may be part of the reason manufacturing firms faced a sharper increase in goods and materials costs. Indeed, a number of firms in our surveys have told us about significant increases in the costs of tariffed inputs over the past year, on products such as aluminum, steel, equipment, electrical supplies, auto parts, coffee, and cocoa, among others.
Although the chart above shows which cost categories increased the most, the impact of such increases can vary depending on the nature of the firm. For example, utilities and materials inputs would represent a larger share of costs for manufacturers compared to, say, a consulting firm, where labor costs would have more of an impact. Thus, cost increases for any category could have more of an effect on some firms than others.
Looking Ahead
As shown in the first chart, cost increases are expected to slow to 5.4 percent for service firms and 4.8 percent 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.
Jaison R. Abel is head of Microeconomics in the Federal Reserve Bank of New York’s Research and Statistics Group.
Richard Deitz is an economic policy advisor in the Federal Reserve Bank of New York’s Research and Statistics Group.
Nick Montalbano is a data analytics specialist in the Federal Reserve Bank of New York’s 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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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).
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