Economy 4 min read By Bethany Hadley
US Services Sector Cools in September as Price Pressures Build
Activity in the US services sector slowed in September while input costs rose at a faster pace, according to a closely watched survey, complicating the Federal Reserve's outlook on inflation and interest rates.
Activity across the US services sector lost momentum in September while price pressures intensified, according to a closely watched business survey, adding a note of caution to the Federal Reserve's assessment of inflation and the path of interest rates.
The survey showed a measure of services activity easing from the previous month, with new orders and business activity expanding at a slower pace. At the same time, the prices paid component — which tracks the cost of inputs for service providers — rose more sharply, suggesting that inflationary pressures in the labour-intensive services economy are not yet fully contained.
Services account for the bulk of US output and employment, making the sector a critical gauge of underlying price trends. Unlike goods, where prices have largely normalised after pandemic-era disruptions, services inflation has proved stickier, driven by wage growth and resilient consumer demand. The latest reading reinforces that view, even as headline inflation has retreated from its 2022 peak.
The data lands as Fed officials weigh whether to keep interest rates at their current level or signal further tightening. Policymakers have repeatedly said they are watching services prices closely for evidence that inflation is on a sustainable path back to the 2 per cent target. A cooling in activity alongside rising costs presents a difficult combination: it suggests demand is softening but not enough to relieve price pressures.
Economists note that a slowdown in services activity can be a sign of weaker consumer spending, particularly as households draw down pandemic-era savings and face higher borrowing costs. However, the same slowdown can also reflect supply-side constraints or a rebalancing after a strong summer. The survey's details — including employment and backlog of orders — will be scrutinised for clues about whether the moderation is broad-based or concentrated in a few industries.
Financial markets have been sensitive to any indication that inflation could prove more persistent than expected, as it would keep the Fed from cutting rates as quickly as investors hope. The September services report adds to a mixed picture: manufacturing has shown signs of stabilisation, while the services engine appears to be losing some steam without yet delivering the disinflationary relief central bankers want.
For British businesses and investors, the reading matters beyond US shores. American demand is a key export market for UK services and goods, and US interest rates influence global financial conditions, including sterling and UK borrowing costs. A US economy that slows too abruptly could weigh on UK exporters, while persistent US inflation could keep global rates higher for longer, adding pressure to UK households and companies already coping with elevated costs.
The survey is one of several data points due this week that will shape expectations ahead of the Fed's next policy meeting. Attention will now turn to the official employment report and inflation figures for further clarity on whether the services sector's price pressures are transient or entrenched. For now, the September reading offers little comfort to those hoping for a swift return to low and stable inflation.
3
