Prices paid by U.S. service businesses hit their highest since 2022 as the ISM index eases to 54.9

Prices paid by U.S. service businesses rose in September to their highest level in more than four years, the Institute for Supply Management said Monday, even as its main gauge of activity in the sector cooled slightly.

The group's services prices index rose 1.4 points to 74, the highest since July 2022, when it reached 74.5. The index measures how widely costs are rising rather than by how much: a reading above 50 means more companies paid higher prices than paid lower ones. In September, 50.3% of respondents said they paid more, up from 44.8% in August, and only 2.2% said they paid less. Seventeen industries reported higher prices and none reported a decrease.

The headline Services PMI slipped to 54.9 from 55.4. That is the 27th straight month above 50, the line between growth and contraction, and only a little below forecasts: one survey of economists had expected 55.2, another 55.

What cooled, and what did not

Business activity, the services counterpart to factory output, fell 5.2 points to 56.5 after August's 61.7. New orders eased to 59.8 from 60.9. Both still point to growth.

Hiring moved the other way. The employment index rose 2.3 points to 50.1, above 50 for the first time in three months. Steve Miller, who chairs the institute's services survey committee, said the gain "seems to have resulted from increasing backlogs, as well as high levels of business activity and new orders." The backlog of orders index rose to 56.6, which the institute said was its highest level since July 2022.

Foreign demand weakened. New export orders fell 9.4 points to 46.9, the first reading below 50 in eight months.

Fuel tops the list of complaints

Miller said tariffs and fuel costs were the issues respondents cited most, and that fuel costs "were mentioned twice as often as any other single issue impacting performance." Fuel was reported up in price for an eighth straight month, and diesel, gasoline, copper, steel and memory products were also on the list of rising costs. Lumber and pork products were the only items reported down.

Respondents described the pressure in plain terms. A retailer said "shipping containers from overseas are double the cost, causing price increases." A farm business said the high cost of diesel "has increased the cost of freight dramatically."

Deliveries also slowed. The supplier deliveries index rose to 53.2 from 51.3; in this survey a reading above 50 means suppliers are taking longer, which tends to add to costs.

The services survey echoes the institute's factory survey last week, in which the manufacturing prices index jumped 6.8 points to 77.9. A separate services survey from S&P Global, also released Monday, rose to 58.8, its strongest since July 2021, and showed input costs rising at the fastest pace since November 2022.

Why it matters for the Fed

The Federal Reserve raised its benchmark rate by a quarter point in September, to a range of 3.75% to 4%, its first increase in three years. Vice Chair Philip Jefferson said on Oct. 1 that policymakers "will need to come to our own judgment, which may take more time."

Investors had already scaled back bets on another increase at the Oct. 27-28 meeting after cooler inflation readings for July and August and a sharp slowdown in hiring in September. On Monday, futures pricing implied roughly a 26% chance of an October hike, down from about 71% the week before, according to CME Group's FedWatch tool.

Some economists read the survey as a case for doing more. The rising prices index, together with "the uptick in supply chain stress and backlog of new orders suggest price pressures are building," Matthew Martin, senior U.S. economist at Oxford Economics, said in comments carried by a wire service. "With underlying growth strong, the economy can withstand additional policy tightening."

Bond yields edged up. The 10-year Treasury yield was 5.33% at 2:31 p.m. ET, about 5 basis points above Friday's close and near its highest level since 2002. A basis point is one-hundredth of a percentage point.