The US services sector, the largest part of the economy, grew at a slightly slower pace in October, but the cost pressures that have kept inflation elevated showed little sign of easing. The Institute for Supply Management (ISM) reported its services purchasing managers' index (PMI) slipped to 54.5 from 54.9 in September. Any reading above 50 signals expansion, so the sector is still growing—just not as quickly as before.
The details behind the headline number point to a cooling in demand. The new orders index, a forward-looking measure of future business, fell to 55.9 from 59.8. That's a notable drop, though it remains in growth territory. For everyday investors, this suggests that while consumers and businesses are still spending on services—from travel to dining to software—the pace is slowing.
Why prices are still sticky
The more concerning part of the report is what it says about inflation. The prices-paid index, which measures what service providers are paying for inputs like labor, energy, and transportation, barely budged, coming in at 73.0 versus 74.0 in September. That's still a very high reading, indicating that businesses continue to face hefty cost increases.
Adding to the pressure, the supplier deliveries index rose to 56.7. In this survey, a reading above 50 means deliveries are slowing—not speeding up. When suppliers take longer to deliver materials and components, it often translates into higher costs, as companies may have to pay more for expedited shipping or face production delays.
This combination—slowing demand but persistent cost pressures—is a classic sign of what economists call "sticky" services inflation. Unlike goods prices, which can fall quickly when demand drops, services prices tend to adjust slowly. That's because a large chunk of services costs are labor, and wages are notoriously slow to decline. As long as companies can pass higher costs on to customers, inflation in services can linger even as the broader economy cools.
What this means for the Federal Reserve
The Federal Reserve has been watching this data closely. The central bank recently held its benchmark interest rate in the 3.75%–4.00% range, pausing after a series of cuts. The Fed's goal is to bring inflation down to its 2% target without causing a recession. But if services prices remain elevated, the Fed may be reluctant to cut rates quickly, fearing that cheaper borrowing costs could reignite price pressures.
For investors, the message is clear: the era of rapid rate cuts may not be imminent. As we've noted in our coverage of central banks pausing in October, policymakers are treading carefully. The sticky services inflation is one reason why.
How this affects your portfolio
When the prices-paid index sits in the 70s, it's a reminder that inflation pressure may show up later in the official data the Fed watches, like the Consumer Price Index. If service companies keep protecting their profit margins by raising their own prices, markets tend to keep expecting restrictive policy—meaning interest rates stay higher for longer.
The result is firmer pricing for short-dated US Treasuries, which are most tied to where the Fed sets policy next. For long-duration assets—like growth stocks and long-term bonds—the outlook is tougher, because their valuations depend more on falling interest rates over time. When rates stay high, the present value of future earnings shrinks, putting pressure on those assets.
That said, the slowdown in new orders could eventually ease price pressures. If demand continues to cool, companies will lose the ability to pass on higher costs, and services inflation should start to moderate. But that process can be slow, and the October data suggests it hasn't started yet.
Global context
The US isn't alone in seeing mixed services data. In Europe, Germany's services growth cooled in October as hiring dipped, while France's services sector shrank faster than expected. Meanwhile, Italy's services growth persisted but cost pressures hit a two-year high. These trends suggest that sticky services inflation is a global phenomenon, not just a US one.
For investors, the takeaway is to expect continued volatility in rate-sensitive sectors. The Fed's next moves will depend on a steady stream of data, and this ISM report is just one piece of the puzzle. But it's an important one, because services make up the bulk of US economic activity.
As always, it's wise to keep a diversified portfolio and not make drastic changes based on a single report. The economy is still growing, and while inflation is sticky, it's not accelerating. The path ahead is uncertain, but the data will guide the way.
