US Services Sector Slows as Inflation Pressures Build

US services sector activity decelerated in September, but rising price pressures suggest inflation may persist into next year. The Institute for Supply Management's nonmanufacturing Purchasing Managers' Index (PMI) fell to 54.9 from 55.4 in August, though it remains above the 50 threshold indicating growth. Strong domestic demand, particularly in consumer spending and business investment in AI, is driving economic expansion. However, supply chains are struggling, exacerbated by the US-Israeli conflict with Iran, which has pushed energy prices higher and caused shortages in commodities shipped through the Strait of Hormuz.

Diesel prices have hit record highs, impacting farmers and truckers, while other sectors report shortages of steel, fuel, and memory components. The survey's measure of supplier deliveries increased to 53.2, signaling slower deliveries for 22 consecutive months. The ISM's gauge of prices paid by businesses for materials and services jumped to 74.0, the highest level since July 2022, with commodities like copper, diesel, and petroleum-based products seeing price increases. Economists warn that these rising costs could soon spill over into other sectors, broadening inflation pressures.

Analysts remain divided on whether the Federal Reserve will raise interest rates at its October meeting, with financial markets pricing in a roughly 26% chance of a rate hike. While cooler-than-expected inflation readings and a slowdown in nonfarm payroll growth have reduced the likelihood of an increase, some argue that the building price pressures justify further tightening. The ISM survey also showed growth in services sector employment after two months of contraction, supporting the view that the labor market remains stable despite weaker payroll gains.