• September ISM Services PMI expected at 55.0, down from 55.4 in August, signaling continued expansion but at a slightly slower pace.
  • Prices Paid is forecast to rise to a fresh 50-month high of 73.3 from 72.6, intensifying concerns about persistent service-sector inflation.
  • Employment is seen improving to 48.8 from 47.8, but remains in contraction territory, highlighting a cautious hiring environment.

A Resilient But Inflationary Expansion

The U.S. services sector is expected to show modest cooling in September, with the Institute for Supply Management’s composite PMI forecast at 55.0, according to consensus estimates. That would be a slight dip from August’s 55.4, which was the strongest reading in months, but still comfortably above the 50 mark that separates expansion from contraction. The report, due at 10:00 a.m. Eastern on October 5, comes as investors and policymakers scrutinize every data point for clues on the trajectory of inflation and interest rates.

Underneath the headline, the details are likely to reveal a familiar tension: demand remains robust, but cost pressures are intensifying. New Orders are expected to ease to 60.3 from 60.9, still indicating solid client demand, while Employment is seen improving to 48.8 from 47.8—though a reading below 50 would mark a third consecutive month of contraction. The most closely watched component, Prices Paid, is projected to climb to 73.3, the highest since August 2022, underscoring that inflation in the service sector is far from tamed.

“The services economy is still expanding at a healthy clip, but the price picture is troubling,” said a market strategist who asked not to be named. “Firms are facing higher costs for everything from petroleum-based products to GPUs, and they’re passing some of that along to customers.”

Fed’s Dilemma Deepens

The September ISM Services report lands just weeks after the Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75%–4.00%, citing solid economic growth and elevated inflation. Fed officials have repeatedly stressed that they need to see a sustained decline in inflation before considering a pause. A Prices Paid reading above 73 would reinforce the view that inflation is sticky, particularly in services, which account for the bulk of U.S. economic activity.

ISM’s August survey commentary cited higher prices for petroleum-related products, GPUs, steel, and memory, as well as uncertainty in the Middle East and tariff tensions with Canada. Those forces show little sign of abating. “Regulatory stability and supply-chain disruptions are top of mind for purchasing managers,” said a person familiar with the survey responses. “The cost environment remains challenging.”

Meanwhile, the employment component’s sub-50 reading suggests that firms are managing rising input costs by holding back on hiring rather than expanding payrolls. That could complicate the Fed’s efforts to engineer a soft landing, where inflation cools without a sharp rise in unemployment.

Market Sensitivity High

Financial markets are likely to react sharply to any deviation from expectations. A stronger-than-expected PMI or a higher Prices Paid figure would be interpreted as evidence that the economy can withstand further tightening, but also that inflation is proving more persistent. That could push Treasury yields higher and weigh on rate-sensitive equities. Conversely, a weaker headline or a meaningful drop in Prices Paid would support a less hawkish outlook.

“The market is hyper-focused on the prices component,” said a fixed-income portfolio manager at a large asset manager. “If it comes in hot, expect yields to spike and rate-cut expectations to get pushed further out.”

A spokesperson for the ISM declined to comment on the forecasts ahead of the release. The organization is scheduled to publish the report at 10:00 a.m. Eastern.

Correction: An earlier version of this article misstated the prior 18-month employment trend. Employment was in contraction in 13 of the prior 18 months, not 12.