U.S. Services Sector Cools in September, Price Pressures Building

• United States (U.S.) services sector activity slowed in September, while strong domestic demand stretched supply chains and pushed a measure of prices paid by businesses for inputs to its highest level in more than four years, suggesting inflation could remain elevated into 2027.
• Complaints about higher fuel prices dominated responses to the Institute for Supply Management (ISM) survey published on October 5, 2026. The US-Israeli war with Iran has raised prices of energy and related products and led to shortages of commodities shipped through the Strait of Hormuz. Diesel prices are at record highs, hitting farmers and truckers. Economists have also warned that higher prices could soon spill over to other sectors and broaden inflation pressures.
• The ISM ⁠said its non-manufacturing Purchasing Managers' Index (PMI) fell to a still-high 54.9 last month from 55.4 in August. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of US economic activity. Economists polled by Reuters had forecasted that the PMI would be largely unchanged at 55.2. The PMI is at a level consistent with strong economic growth in the third quarter. The economy is being driven by robust domestic demand, mostly consumer spending and business investment in AI and related infrastructure.
• Thirteen services industries reported growth last month, including wholesale trade, utilities, retail trade, information, transportation and warehousing, as well as finance and insurance, accommodation and food services. Among the four industries reporting a contraction were mining and construction.
• But supply chains are struggling to cope, a situation that has been worsened by the conflict in the Middle East. Steve Miller, the chair of the ISM Services Business Survey Committee, said "tariffs and fuel cost impacts were the most cited issues impacting respondents' supply chain," noting that "fuel costs were mentioned twice as often as any other single issue impacting performance."
• The survey's measure of supplier deliveries increased to 53.2 from 51.3 in August. A reading above 50 indicates slower deliveries. That measure has slowed for 22 consecutive months, boosting input prices. Supplier delivery performance was initially affected by tariffs on imports.
• The surveys pointed to higher inflation down the road. Last month, the Federal Reserve raised its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range, its first hike in three years, and flagged further increases in borrowing costs ahead. Financial markets were pricing in a roughly 26% chance of a rate increase at the Fed's meeting this month, down from about 71% last week, CME Group's FedWatch tool showed.

(Source: Reuters)