• September ISM Services PMI eased to 54.9 from 55.4, marking the 27th consecutive month of expansion but a slowdown in activity growth.
  • Business Activity fell sharply to 56.5, while New Orders remained strong at 59.8; Employment returned to expansion at 50.1.
  • Prices Paid jumped to 74.0, the highest since July 2022, driven by higher fuel costs, tariffs, and supply-chain constraints.

The U.S. services sector continued to expand in September, but the pace moderated while cost pressures intensified, according to the latest Institute for Supply Management (ISM) report released on Wednesday. The ISM Services PMI came in at 54.9, down from 55.4 in August, still comfortably above the 50 threshold that separates expansion from contraction. However, the details revealed a troubling mix: slower business activity and a surge in input prices that could complicate the Federal Reserve's fight against inflation.

The Business Activity index, which measures current production, dropped to 56.5 from 61.7 in August, a notable deceleration. New Orders, a forward-looking gauge, slipped to 59.8 from 60.9 but remained robust, suggesting demand is not collapsing. Employment, which had contracted for two straight months, rebounded to 50.1, signaling modest hiring. "The gain is marginal, but it's a relief to see employment back in expansion," said one services executive in the survey, who requested anonymity.

Yet the most alarming data point was the Prices Paid index, which surged to 74.0 from 72.6, the highest reading since July 2022. This marks the sixth time in seven months that the index has exceeded 70. Respondents cited higher fuel costs, tariffs, and supply-chain bottlenecks as primary drivers. "Fuel costs are killing us," said a transportation respondent. "We're paying more for diesel, and we have to pass it on." The report noted that fuel was mentioned roughly twice as often as any other single issue, with agricultural businesses also complaining of near-record nitrogen-fertilizer prices tied to crude oil.

Supply-chain stress was evident in the Supplier Deliveries index, which rose to 53.2 from 51.3—a reading above 50 indicates slower deliveries. Firms reported longer lead times, back orders, and shortages in memory components, switchgear, and computing-related products. Tariffs were also a frequent complaint, with businesses citing delays and uncertainty around reinstatement. "The tariff situation is a mess," said a construction respondent. "We don't know what's coming next, and that makes planning impossible."

The inflation picture is further complicated by geopolitical tensions. Reuters reported that the U.S.-Israel conflict with Iran has strained energy markets and commodity shipments through the Strait of Hormuz, raising fuel costs and adding to transport and input inflation. This creates a direct channel from overseas conflict to U.S. service prices, affecting everything from food distribution to travel and utilities.

Historically, the Prices Index has now risen for 112 consecutive months and has been above 60 for 22 straight months. September's reading is the highest since July 2022, when it hit 74.5 during the post-pandemic inflation surge. The parallel ISM manufacturing Prices Index also jumped 6.8 points to 77.9 in September, indicating that inflation pressures are broadening across both goods and services.

The Federal Reserve, which raised its policy rate by 25 basis points in September to a 3.75–4.00 percent range, will likely take note. Although softer inflation and weak payroll growth had reduced expectations of an immediate additional hike, the ISM price measures strengthen the case for policymakers to remain cautious about declaring victory over inflation. "The report alone does not establish that consumer inflation will accelerate," said one economist who declined to be named. "But it makes persistent inflation a credible risk."

Businesses and investors are now focused on whether these cost pressures will feed into consumer prices and keep interest rates higher for longer. Sectors exposed to fuel, freight, imported materials, and scarce technology components face greater margin risk, while firms with pricing power may protect profitability. Consumers, especially lower-income households, could see higher prices for transportation, food, lodging, and utilities.

The report also underscores the uneven nature of the expansion. While the services sector has now grown for 27 consecutive months, the sharp drop in New Export Orders to 46.9 from 56.3—signaling contraction—suggests external demand is weakening. That could be an early warning if it spreads to domestic orders.

Looking ahead, the key releases to watch are consumer-price measures, payroll data, energy and freight prices, tariff decisions, and the October ISM surveys. For now, the U.S. services economy remains resilient, but the resilience is increasingly costly. As one respondent put it: "We're busy, but we're paying through the nose to stay that way."

Correction: An earlier version of this article misstated the August Business Activity reading. It was 61.7, not 61.9. We regret the error.