Two of the most closely watched surveys of the US service sector told very different stories about growth in September, but they agreed on one uncomfortable point: prices are heating up again.
The Institute for Supply Management (ISM) said its services purchasing managers' index (PMI) slipped to 54.9, down from the previous month, as business activity and new orders eased. A reading above 50 still signals expansion, so the sector is growing, just at a slower pace. Meanwhile, S&P Global's rival survey jumped to 58.8, its fastest pace since July 2021, pointing to a surge in demand.
The divergence matters because services make up the bulk of the US economy. When these surveys move, they can shift expectations for growth and inflation, and that feeds directly into how investors price everything from stocks to bonds.
Why prices are the real story
Even as the headline numbers pointed in opposite directions, both surveys flagged building inflation pressure. ISM's prices paid index rose 1.4 points to 74, the hottest reading since July 2022. S&P Global also reported "substantial" price pressures, with input costs rising at their quickest rate since November 2022.
Oxford Economics, an economics research firm, noted that higher prices, combined with supplier stress and a growing backlog of work, can make it easier for companies to pass costs on to customers. In plain terms: when businesses are busy and can't get supplies fast enough, they have more power to raise prices without losing sales.
That dynamic is especially important for inflation because service-sector prices tend to be sticky. They are often tied to wages, which move slowly, and once they start climbing, they can be hard to reverse.
What the surveys mean for the Fed
For investors, the key takeaway is what this means for the Federal Reserve. The central bank has been trying to bring inflation down to its 2% target, and it has signaled it may hold interest rates steady at its next meeting later this month. But hotter service-sector pricing complicates that picture.
Markets can usually shrug off a little noise in growth data. But when price pressures build in services, it's harder to ignore, because it suggests inflation could stay elevated for longer. That can push investors to expect the Fed to keep policy restrictive for a longer period, a scenario often called "higher for longer."
When those expectations build, they tend to show up first in the most rate-sensitive corners of the market. Short-term Treasury yields often rise, and stocks whose profits are expected far in the future, sometimes called long-duration stocks, can see their valuations squeezed.
Chris Williamson, chief business economist at S&P Global, said the combination of strong services growth and "encouragingly solid" manufacturing points to rapid economic momentum. That's good for growth, but it also means solid demand can keep inflation sticky, even when one survey suggests the economy is cooling.
What it means for investors
For everyday investors, the takeaway is not to overreact to any single survey. The two reports are telling different stories, and the truth probably lies somewhere in between. But the consistent message on prices is worth paying attention to.
If inflation stays hot, the Fed may be less willing to cut rates soon, which could keep borrowing costs higher for mortgages, car loans, and credit cards. It could also mean more volatility in bond markets and for growth-oriented stocks.
Investors should watch upcoming inflation data and any comments from Fed officials for clues about the next move. The earlier report on cooling services growth had suggested the Fed might have room to ease, but the latest price signals muddy that picture.
In the meantime, the mixed surveys are a reminder that the economy is sending conflicting signals. Growth may be slowing in some areas, but prices are not cooperating. That's a tricky backdrop for markets, and it means the Fed's job is far from done.
