LONDON- US service sector inflation has started to decelerate in response to a general slowdown in the economy and more cautious spending by households and businesses, but it is still running twice as fast as the Federal Reserve’s target.
Services prices rose at an annualized rate of 8.1 percent over the three months to July, data from the US Bureau of Labor Statistics (BLS) showed.
That was slower than the 9.9 percent increase over the three months to June, the highest for 40 years (“Consumer price index”, BLS, Aug. 10).
But services prices were still rising at an annualized rate of 4.1 percent between June and July, roughly twice as fast as the US central bank’s flexible average inflation target (FAIT) of a little over 2 percent per year.
Services inflation is often a better guide to underlying price pressures in the economy and is closely monitored by central banks officials.
Services price changes tend to be less volatile than for merchandise because they are less impacted by changes in the price of energy and raw materials.
However they are also more persistent and exhibit more inertia because wages, salaries and other worker compensation account for a larger share of total costs.
Service sector growth has cooled significantly since the start of the year based on purchasing managers’ surveys conducted by the Institute for Supply Management.
The ISM non-manufacturing activity index has 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 percent of consumer expenditures, and with the real earnings falling as wage rises fail to 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 will probably not relax in the short term. – Reuters
