Service sector

Prices are rising widely in the massive service sector and companies are able to pass on these higher prices

The whole mentality has changed.

By Wolf Richter for WOLF STREET.

Services represent about two-thirds of the economy. During the pandemic, discretionary services such as travel and entertainment have been hit hard, and consumer spending on services in February was still down 5.2% from a year ago. But the services sector is huge, ranging from healthcare to technology, and demand has been strong in many segments and is coming back in others. Amid backlogs and shortages, input prices are skyrocketing and companies are able to pass on these higher prices. The Fed might refuse to acknowledge it, but everyone sees it.

“The biggest concern is inflation, with price indicators hitting new survey highs in March, with demand often outstripping supply for a wide variety of goods and services,” IHS Markit reported today in its services PMI.

“On the price front, input costs soared in March. The rate of inflation has accelerated at its fastest since the start of data collection for the services survey in October 2009,” the report said.

“Subsequently, companies sought to pass on higher costs to customers through higher sales prices,” the report said.

“A number of companies also said that stronger customer demand allowed them to pass on a greater proportion of the cost increase. The resulting rate of charge inflation was the fastest on record,” the report said.

These kinds of pricing pressures in the services sector were also flagged today by the Institute of Supply Management’s comprehensive ISM Services business report, whose index of prices paid for materials and services increased in March at the fastest pace since 2008.

All 18 service industries in the index posted higher prices. The index has now posted price increases for the 10th straight month, following price declines in April and May last year.

Values ​​above 50 indicate that companies are paying higher prices in the current month compared to the previous month, values ​​below 50 indicate that they are paying lower prices than in the previous month. The higher the value above the gray line, the stronger the price acceleration. The value of 74 in March indicates the strongest acceleration in prices paid since July 2008 (data via YCharts):

All 18 industries in the index reported higher prices in March. They were, in this order: Construction; Wholesale trade; Utilities; Mining; Real estate, rental and leasing; Business Management & Support Services; Public administration; Retail business; Transportation and warehousing; Finance & Insurance; Other services; accommodation and catering services; Agriculture, Forestry, Fishing & Hunting; health care and social assistance; Arts, entertainment and recreation; Professional, scientific and technical services; Educational services; and information.

One of the panel executives, whose business is in the construction industry, said:

“Demand for new residential home construction continues to outstrip supply. Delays, interruptions and shortages of building materials begin to develop. Shipping delays at the ports of Los Angeles and Long Beach contributed to longer delays. The cold weather in Texas has hurt several component makers for building materials. We have encountered the “perfect storm” for building material shortages and price increases. »

An executive whose company is in the information industry, said:

“Resin and oil price increases are starting to affect the products we buy. In addition to price increases, we are also seeing longer lead times as supply chains pivot to find cheaper supply options.

This shows that price increases are now spreading through the service sector, that businesses generally pay higher prices, and that they are generally able to pass on higher prices because their customers are more accepting of price increases. The whole mentality has changed.

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