The US services sector, the biggest engine of the American economy, lost a little steam in September. But a closely watched gauge of prices paid by businesses jumped, a sign that inflation is still proving stubborn and keeping the Federal Reserve's options open for another interest-rate hike before the year is out.
The Institute for Supply Management (ISM) reported that its services purchasing managers' index (PMI) slipped to 54.9 in September, down from the previous month but still comfortably above the 50 mark that separates expansion from contraction. A reading above 50 means the sector is growing, just at a slightly slower pace.
The bigger surprise came from the survey's prices-paid index, which climbed to 74.0. That level indicates that a large share of service providers are still seeing their costs rise, from wages to materials and day-to-day operating expenses. For economists, this is a red flag because services inflation tends to be stickier than goods inflation—it's closely tied to labor costs, which are slow to adjust.
Why services matter for the inflation fight
Services account for the bulk of US economic output, so what happens in this sector has outsized influence on the overall inflation picture. While goods prices have cooled as supply chains have healed, services prices have been slower to follow. That's why the Fed has been watching this part of the economy so closely.
The jump in the prices-paid index suggests that the disinflation trend may be stalling. It also complicates the central bank's path. After a series of aggressive rate hikes over the past couple of years, the Fed has signaled it wants to be careful not to overdo it. But if inflation refuses to fade, policymakers may feel compelled to act again.
According to the brief, the September data "kept a December Fed hike on the table." That means investors are now weighing the possibility that the central bank could raise its benchmark rate one more time before the end of the year, a move that would ripple through borrowing costs, stock valuations, and bond yields.
What it means for investors
For everyday investors, the key takeaway is that the economy is still growing, but the inflation fight is not over. A resilient services sector is generally good for corporate earnings and the job market, but persistent price pressures could force the Fed to keep rates higher for longer.
Higher interest rates tend to weigh on stock prices, especially for growth-oriented companies that rely on future cash flows. They also push up yields on government bonds, which can make fixed-income investments more attractive relative to stocks. On the flip side, a still-growing economy supports consumer spending and business activity, which is a positive for many companies.
The data also has implications for other markets. For instance, oil prices have been volatile, and any signs of stronger demand or inflation can influence energy costs. Meanwhile, hedge funds have been adjusting their positioning in response to shifting rate expectations and commodity moves.
Globally, the US services reading stands in contrast to other regions. Germany's services sector rebounded in September, while Italy saw growth cool as input costs hit their highest since May. These crosscurrents highlight how inflation and growth are playing out differently around the world.
What to watch next
Investors will be parsing upcoming economic data and Fed speeches for clues about the December meeting. The central bank has emphasized that its decisions will be data-dependent, so every jobs report, inflation print, and PMI reading will matter.
For now, the September services report offers a mixed picture: growth is moderating, but price pressures are not. That combination leaves the Fed in a tough spot—and investors with plenty to think about as they position their portfolios for the months ahead.
