Service sector

US service-sector inflation decelerating but still elevated: Kemp

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LONDON — U.S. service-sector inflation has started to ease in response to a general slowing economy and more cautious household and business spending, but is still twice as fast as the Federal Reserve target.

Services prices rose at an annualized rate of 8.1% in the three months ending July, according to data from the US Bureau of Labor Statistics (BLS).

This was slower than the 9.9% increase in the three months to June, the highest in 40 years (“Consumer Price Index”, BLS, August 10).

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But services prices continued to rise at an annualized rate of 4.1% between June and July, about twice as fast as the US central bank’s flexible average inflation target (FACT) of just more than 2% per year.

Services inflation is often a better indicator of underlying price pressures in the economy and is closely watched by central bank officials (https://tmsnrt.rs/3SSHtWf).

Changes in the prices of services tend to be less volatile than those of goods because they are less impacted by changes in the prices of energy and raw materials.

However, they are also more persistent and exhibit more inertia because wages, salaries and other worker compensation represent a larger share of total costs.

Growth in the services sector has slowed considerably since the start of the year according to surveys of purchasing managers conducted by the Institute for Supply Management.

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The ISM non-manufacturing activity index slipped to 56.7 in July (66th percentile for all months since 1997) and 55.3 in June (45th percentile) from 58.3 in March (86th percentile) and 68, 4 in November 2021 (a record).

Services account for more than 60% of consumer spending, and with real incomes falling as wage increases do not keep pace with price increases, some slowdown in service sector activity and inflation was inevitable.

Policymakers are likely to welcome signs that inflation has peaked, but they are unlikely to let up in the near term.

The path for central bank interest rate policy to achieve a soft landing for the economy remains extremely narrow (and may in fact not exist) because there is so little spare capacity in the economy. .

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There may still be some in the labor market (where labor force participation is below pandemic levels), but there is little or no available capacity in the energy and utility markets. materials, manufacturing capacity and transportation of goods.

Even in the labor market, total compensation for workers in the private services sector rose at an annualized rate of 6.6% in the second quarter, as demand for labor exceeded supply at prevailing rates.

The central bank needs a lot more disinflation to bring the rate of inflation back to its long-term target, meaning further interest rate hikes may be needed.

No central bank wants to deliberately push the economy into recession. But policymakers cannot afford to stop tightening monetary conditions too soon without risking another surge in inflation.

Associated columns:

– U.S. manufacturing activity shows signs of peaking (Reuters, August 9)

– U.S. diesel shortage shows economy reaching capacity limit (Reuters, Aug. 4)

– U.S. consumers soured by inflation despite pandemic financial cushion (Reuters, July 15)

– U.S. service-sector inflation threatens commodity prices (Reuters, July 7)

John Kemp is a market analyst at Reuters. Opinions expressed are her own (Editing by Barbara Lewis)

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