(Reuters) – Manufacturing activity in the Mid-Atlantic region dropped off sharply and unexpectedly in February, and goods producers reported input cost increases accelerated for the first time in 10 months while their own price increases slowed dramatically, signaling margin pressures were building.

The Philadelphia Federal Reserve’s monthly manufacturing index plunged to -24.3 this month from -8.9 in January, belying expectations among economists for a third straight monthly improvement. The median estimate in a Reuters survey of economists was for -7.4, and the reading was more than twice as weak as the lowest estimate in the poll.

Indexes tracking new orders, shipments, delivery times and employee headcount all weakened.

Meanwhile, the survey’s two measures of prices, those paid by producers and those they charge their customers – both closely watched inflation indicators – showed margins were slimming. The prices paid index edged up to 26.5 from 24.5 to mark its first increase since April 2022, while the prices received index fell by 50% to 14.9, the lowest reading since February 2021.

Moreover, firms expect smaller price increases for consumers in the next 12 months than they did in November. In a special question, firms said they expect to impose 4.5% price increases for their own products in the year ahead, down from 4.8% when asked the same question in November and also lower than the 7.0% price increases they’d realized over the last year.

Some Federal Reserve officials have been looking for a reversal in the trend for margins as another signal that the high inflation they’ve been battling for the last year may continue to wane. The Fed earlier this month raised its benchmark interest rate by a quarter percentage point to between 4.50% and 4.75% and indicated further increases were warranted as inflation remains too far above its targeted level of 2% annually.

For U.S. consumers overall, producers in the survey estimated prices would increase 4.0% over the next 12 months, down from 5.0% in the November survey, and their expectations for longer-run consumer inflation over a 10-year horizon dropped to 3.0% from 4.0%.

Wage increases were also expected to be lower at 4.8% in the year ahead, down from 5.0% in the November survey.

(Reporting By Dan Burns; Editing by Chizu Nomiyama)