The Institute for Supply Management’s service index rose in November as business activities increased on the month.
The unexpectedly strong purchasing managers survey data, released on Monday, added more pressure on the Federal Reserve as focuses on taming inflation, especially in services.
The prices-paid component—a proxy for service prices—fell slightly in November to 70 from 70.7, though was still elevated. The five-year average from 2014 to 2019, before the pandemic, was only 56.4.
There was still a gap between demand and supply in the service sector. Inventories contracted for the sixth straight month while the backlog of orders grew for the 23rd month in a row.
While the imbalance between demand and supply has narrowed in recent months as supply-chain disruptions have eased, that imbalance has continued to add more pressure on prices.
There are signs that inflation has peaked and rolled over, but they are mostly from the goods market. Service inflation should continue to be elevated as the sector continues to recover from the depths of the pandemic.
The employment subindex was back to expansion territory after contracting in October, consistent with the November jobs report released last week. Despite layoff announcements hitting the news lately, the sector is still struggling with hiring, the survey respondents reported.
Together with the robust jobs report, more signs of a tight service labor market should be a concern for the Fed as it tries to keep wage inflation—which accounts for most service inflation—in focus.
The stronger-than-expected service data was not something that the Fed is looking for. The data will not move the Fed away from hiking 50 basis points in December in our opinion, and it strengthens our call for more rate hikes early next year to bring the policy rate to 5% or above, where monetary policy is restrictive enough to tame inflation.