US: Services sector cools, price pressures build

The US services sector activity decelerated in September, as robust domestic demand strained supply chains and propelled a gauge of prices paid by businesses for inputs to its highest level in over four years, signaling potential sustained inflation into 2027. Fuel prices dominated complaints in the Institute for Supply Management survey released on Monday.

The conflict between the US and Iran has driven up energy costs and led to commodity shortages through the Strait of Hormuz, resulting in record-high diesel prices affecting farmers and truckers. Economists cautioned that soaring prices could soon affect other sectors, intensifying inflation pressures. Some analysts argued that the escalating price pressures justified raising interest rates again this month and in December.

Nonetheless, cooler-than-expected inflation figures for July and August, coupled with a sharp slowdown in nonfarm payroll growth in September, diminished the likelihood of a rate hike at the US central bank's October 27-28 meeting. Matthew Martin, a senior US economist at Oxford Economics, noted that despite strong underlying growth, the economy could handle further policy tightening.

The services sector's nonmanufacturing Purchasing Managers' Index fell to 54.9 in September from 55.4 in August, while the measure of prices paid by businesses surged to 74.0, the highest since July 2022. This surge in input prices paralleled a similar uptick in the manufacturing sector's survey. Both surveys collectively indicated higher inflation in the future.