Inflation in goods has abated, but it remains hot in services: US companies.
By Wolf Richter for WOLF STREET.
The message about “sticky” inflation in services, as seen from the companies’ point of view, was the most interesting element in the S&P Global Flash US Composite PMI for July, released today. It was another item on a long list of items that document inflation in services isn’t just vanishing.
From the companies’ point of view, inflation exists in two forms: their input costs, which include wages; and charge inflation, the prices they can charge their customers. And for services companies both are hot.
The PMI is based on surveys of executives of 800 companies in the US that answer the same questions about their own company every month, whether their own production, input costs, prices charged, etc. were higher, unchanged, or lower than in the prior month. A value of 50 in these indices means that an equal number of executives said that a metric was higher and lower, with the remainder saying it was unchanged. Above 50 means growth, below 50 means contraction. So this is the view of executives about what their own companies are experiencing.
Overall the Flash PMI Composite Output Index, at 52.0, pointed at growth in July, with the Flash Services Business Activity Index at 52.4 and the Flash Manufacturing Output Index at 50.2 (barely growth). “US companies signaled a further rise in business activity during July, with the service sector continuing to drive growth,” the report said. And so the services sector also continued to drive inflation.
For the manufacturing sector, input and output inflation were muted: “Although manufacturers saw a renewed rise in costs, the rate of inflation was only slight,” it said. “Goods producers noted little change in selling prices, with the rate of inflation the joint-slowest in the current 38-month sequence of increase.”
And this “slight” inflation in goods has cropped up in all kinds of other data: inflation in goods has largely abated, and this has been documented also by the Consumer Price Index and the PCE price index.
But for the services sector, it was a different story. “Service providers recorded an elevated pace of increase in operating expenses, with wage costs the main driver behind inflation amid greater challenges to retain staff,” the report said.
These are the costs of service providers, and they’re able to pass on those costs. The “Core Services” CPI was up 6.2% from a year ago, and the “Core Services” PCE Price Index was stuck at 5.4%. So here we go, about companies passing on their services input inflation to their customers:
“The rate of output charge inflation meanwhile picked up in July. Firms sought to pass through higher costs and increased interest rate payments to customers, with the overall rise driven by service providers,” the report said.
“The pace of increase at services firms was steeper than the long-run series average,” it said.
“Sticky inflation” is what the report called this situation in services, adding that the “stickiness of price pressures meanwhile remains a major concern.”
Which is precisely what other data have been saying: Inflation has become entrenched in services. On the input side, we saw this very broadly in labor market data, and it’s what the Fed has been fretting loudly about. So the triumphant announcements that inflation has been “vanquished” because energy prices have plunged from their highs a year ago, and because prices of goods have stabilized may have been a tad premature. Big inflation in services cannot be easily vanquished, as we’re finding out all over again.
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