Updates - Inflation

US services sector picked up in August, along with prices

Ann Saphir
September 6, 2023

 The U.S. services sector unexpectedly gained steam in August, with new orders firming and businesses paying higher prices for inputs — potential signs of still-elevated inflation pressures.

The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing PMI rose to 54.5 last month, the highest reading since February and up from 52.7 in July. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy.

Economists polled by Reuters had forecast the non-manufacturing PMI would decrease to 52.5, and no economist anticipated a higher reading than 53.9.

Federal Reserve officials have raised the central bank’s policy rate by 5.25 percentage points over the last year and a half to bring down too-high inflation, and in recent months have welcomed signs that higher borrowing costs are beginning to bite.

Inflation by the Fed’s preferred measure, the personal consumption expenditures (PCE) price index, rose 3.3% in July from a year earlier, down from a peak of 7% last summer, data published last week showed.

Meanwhile a Labor Department report Friday showed monthly job growth has averaged about 150,000 over the past three months, down sharply from 238,000 in the three months through May.

Also on Friday the ISM reported that its manufacturing PMI contracted in August for the 10th straight month.

Those signs of cooling have helped solidify expectations that the Fed will leave its policy rate steady at its meeting later this month, and may indeed be done with rate hikes altogether.

Speaking Tuesday, Fed Governor Christopher Waller — who has been among the most hawkish of U.S. central bankers — said last week’s “hell of a good week of data” would let the Fed proceed carefully with no pressure “to do anything imminent.”

Still, Fed policymakers view the services sector as key to bringing inflation down to their 2% target, and Wednesday’s ISM report does little to bolster the view that any slowdown is underway.

A measure of new orders received by services businesses rose to 57.5 last month from 55.0 in July. A gauge of prices paid by services businesses for inputs increased to 58.9 in August from 56.8 in July.