The ISM services prices index rose to 74.0 in September, with 17 industries reporting higher prices and none lower. Business activity dropped more than 5 points and export orders slipped into contraction.
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The headline number from Monday's services survey looked unremarkable. The detail underneath it did not.
The Institute for Supply Management's services purchasing managers index came in at 54.9 for September, down from 55.4 in August and close to the 55.0 economists had expected. It was the 27th straight month above 50, the line that separates expansion from contraction. ISM said a reading at that level corresponds to annualized growth in real gross domestic product of about 2.1%.
The prices index told a different story. It rose to 74.0 from 72.6, its highest level since July 2022, when it stood at 74.5, and above the roughly 72.9 economists had forecast. Prices paid have now increased for 112 consecutive months. Of the industries ISM tracks, 17 reported paying more in September. None reported paying less.
Prices against activity
The rise in prices came alongside a cooling in output. The business activity index fell to 56.5 from 61.7, a drop of 5.2 points. New orders eased to 59.8 from 60.9. Export orders, at 46.9, slipped below 50 for the first time in eight months after a 9.4-point drop.
That combination is what makes the report harder for the Federal Reserve than its headline suggests. More firms are paying more for inputs at the same time that fewer are reporting growth in what they produce. The Fed raised rates in September for the first time in three years, and a services sector absorbing higher costs without the volume growth to spread them over is the kind of pressure that tends to show up later in consumer prices.
The prices index measures how many purchasing managers report higher prices, not how much prices rose. A reading of 74.0 says the increases are widespread. It does not translate into a specific inflation rate.
Manufacturing first, services now
The services reading follows a similar move on the factory side. ISM's manufacturing prices index stood at 77.9 in its latest report, up from 71.1. With both sectors now showing price pressure near multiyear highs, the pattern has moved beyond goods and energy alone.
The hiring line
Employment was the one component that improved. The index rose 2.3 points to 50.1, crossing back above 50 after sitting at 47.8 in August. A reading that close to the line is a stabilization rather than a hiring push. It lands three days after the Labor Department reported that employers added only 29,000 jobs in September, with the unemployment rate at 4.2%.
The bond market's response
Treasurys did not react in the first minutes after the 10 a.m. Eastern release. The 10-year yield dipped briefly to about 5.30%, then climbed through the rest of the session to about 5.34% by early afternoon, its highest level in more than two decades. Oil fell over the same window, which would ordinarily ease inflation worries, so the move in bonds came despite cheaper crude rather than because of it.
The two cases
One case holds that inflation pressure is broadening from goods and energy into services, which weakens the argument that last week's soft payrolls give the Fed reason to stop raising rates.
The other holds that activity is cooling, from business activity to export orders to payrolls, and that a diffusion index can overstate how fast services prices are actually rising.
What comes next
Minutes from the Fed's September meeting arrive Wednesday afternoon. The September consumer price index on is the direct test of whether purchasing managers' costs are reaching shoppers. The Fed meets again and 28, and ISM's October services report follows on .