Companies can’t pass on those higher prices? What a bummer. But if they can without losing sales, it’s off to the races. See 2021/2022.
By Wolf Richter for WOLF STREET.
Nearly every subindex of today’s ISM Services PMI grew in February, and many accelerated further from the January pace of growth. Among those that accelerated further: The overall Services PMI and the indexes for employment, new orders, and prices.
And so, the services economy, which dominates the US economy, grew in February at a decent clip, according to the report.
The index that declined at an accelerating pace were imports. And that would be a good thing. Rising imports are a drag on GDP, and imports spiked in December and January in a historic way, according to Census Bureau data, as companies tried to front-run any tariffs to then charge higher prices amid tariff chaos for stuff they hadn’t paid any tariffs on? The profit motive at work.
But prices oh-la-la, with 16 of the 18 services industries reporting an increase in prices paid in February from January. The Prices Index, at 62.6%, was an acceleration of 2.2 percentage points from January, and the third month in a row – December, January, February – above 60, the first time that this occurred since March 2023.
The way these Purchasing Manager Indexes (PMIs) are structured, a value of 50 means no change, a value higher than 50 means growth, and a value below 50 means decline. The higher the value above 50, the faster the growth. The measurement is month-to-month.
In February, 32.4% of the respondents reported price increases from January, while 63% reported no price changes, and 4.6% reporting lower prices.
Here are the past four months. You can see the progression of the acceleration from November through February of those saying they paid higher prices:
| Prices paid | % Higher | % Same | % Lower | Index |
| Feb/2025 | 32.4 | 63.0 | 4.6 | 62.6 |
| Jan/2025 | 25.0 | 71.9 | 3.1 | 60.4 |
| Dec/2024 | 23.7 | 73.4 | 2.9 | 64.4 |
| Nov/2024 | 19.3 | 75.1 | 5.6 | 58.5 |
And note: these are prices the companies paid, not prices they charged. Whether or not they can pass on those higher prices-paid is another story that we’ll get to in a moment.
But, but, but… the tariffs haven’t been implemented yet.
the new tariffs that are being bandied about, rescinded, paused, or renegotiated haven’t been implemented yet. And tariffs don’t apply to services at all, just imported goods if and when they’re finally implemented.
In the December Services PMI, which tracked prices changes from November, the Prices Index accelerated majestically to 64.4%, but Trump wasn’t even President yet.
So you can see what’s going on here: Companies love to raise prices, if they can without losing revenues, and now they feel they can. They feel emboldened to raise prices – which is precisely what triggered the 2021-2022 surge of inflation. Is this now the beginning of the second wave, and this time they’re blaming the still non-existent new tariffs?
Those prices will stick if businesses and consumers are willing to pay them. The chaos around the tariff threats, the media’s tariff clickbait that then goes viral, and corporate fearmongering on tariffs may be accomplishing this feat of getting businesses and consumers to accept higher prices and pay them willingly, thereby nurturing the second wave of inflation into existence.
Can’t pass on those higher prices? What a bummer.
Another US Services PMI released today, this one by S&P Global – which painted a “gloomier picture,” according to itself – also chimed in on rising prices, but added a different and more hopeful angle, that companies weren’t yet able to pass on most of those price increases and thereby ended up eating them:
“Cost inflation also picked up in February as suppliers raised prices, although competitive pressures meant that service providers increased their own charges only modestly.”
“A broad range of goods and services were reported to have risen in price during February, with suppliers in some cases increasing their charges due to [the not-implemented new] tariffs.
“Labor expenses were also reported to have increased.
“Overall, input cost inflation picked up in February to its highest level for four months and further above its long-term trend.
“However, efforts to pass on higher input costs to clients were somewhat limited by competitive pressures, weak market demand and market oversupply. This meant that prices charged rose only modestly overall in February.”
The report then commented further:
“Adding to the gloomier picture in February was a sharp rise in costs, which companies were often unable to pass on to customers due to weak demand. While this reduced pricing power is good news for inflation, it’s potentially bad news for profitability.”
What a bummer.
In search of “pricing power,” the holy grail in business.
Companies love to raise prices and try to do it all the time to see if they can without losing sales. Raising prices pushes up revenues if unit-sales don’t fall as a result of those higher prices. And if a company can raise its prices faster than its costs rise, its profit margins get fatter on top of the revenue increases. Wall Street is ecstatic about this stuff.
This “pricing power” is the holy grail in business. But what keeps companies from raising prices is competition that might not raise prices, so the price-raiser loses sales to that competition. Or customers sometimes refuse to buy and just don’t buy at all, not even from competition, and do without, when particular prices rise.
But in 2021 and 2022, companies suddenly could raise their prices without losing sales, and they were coordinating their price increases in public for all to see – because the media loves to turn this stuff into clickbait – by announcing their price increases so that their competitors could fall in line, and they did, which is why there was this spike of inflation in 2021 and 2022, accompanied by a huge surge in profits and profit margins. And now they again believe they can, and this coordination in public about higher prices has started all over again, and the media is turning it into clickbait all over again.
And they cite the tariffs. But the tariffs that are being talked about, rescinded, paused, and renegotiated haven’t been implemented yet. And tariffs don’t apply to services.
And yet, the common logic being used to explain to their customers why prices have been raised, companies blame the still not-implemented tariffs. It doesn’t matter what they blame. The idea is to raise prices and get away with it without losing sales. And they’re trying, and if their customers let them get away with it, this will turn into the second wave of inflation, even especially in services, which are never tariffed.
Fits right into what we’ve been seeing in the consumer price inflation data: Inflation has been going in the wrong direction for months, long before the tariff chaos even started. Read: Beneath the Skin of CPI Inflation: Worst Month-to-Month Acceleration of CPI since Aug 2023, on Spikes in Used Vehicles, Non-Housing Services, Food, Energy
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You sound like the Austrian economists: “Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.”
quoting Wikipedia: The Austrian school theorizes that the subjective choices of individuals including individual knowledge, time, expectation and other subjective factors cause all economic phenomena.
IF the Fed did not have 100% Keynesians, we would not have our present economic mess and the prophesy that our little green pieces of paper are going the way of the Reichmark after WW 1.
That’s pure B.S. Take Welles Wilders Delta Theory.
It might almost be worth a 2nd round of inflation to watch Trump tap dance his way through it. 😂😂😂
Very crude of you. To wish evil on anyone.
The President is addressing a ticking time bomb. If we don’t bring government spending under control and stop corruption and wasteful spending as well as the flow of illegal aliens including hundreds of thousands of criminals, fentanyl, human trafficking, trade deficits, etc. we will soon face a much greater problem than short term inflation. We have a real and rising national security issue. We need to bring business back to America and create greater competition by getting rid ridiculous regulations that impede competition and promote domestic manufacturing. Tariffs may very well raise inflation in the near term but strengthening our economy will strengthen the nation and ensure economic survival and prosperity for the future. Other nations put their interests first. It is about time that America does so before it is too late.
Wow! Sound like somebody drank their Trump Kool aid today
Thank you.
My thoughts exactly.
How much fentanyl came through the Canadian border last year? Go ahead and check it out, I will wait…
You’re spewing a bunch of hooey, the question is whether or not you know it.
Yikes. Please don’t spread the brain rot here. Few of the things you mentioned were a problem before the Trump show used them for political purposes. Why bother reading this great site if clearly facts are not a priority for you. I would suggest renting the movie Idiocracy and pretending it’s a documentary. You will feel right at home.
If this administration was really concerned about reducing the deficit or the national debt, they would not be slashing revenues. It’s all “supercazzola”.
LOL. You seriously think they care about that? It was a ruse to get the rubes to vote against their interests. And it worked again.
There are lots of bobblehead voters out there who will eat it up and believe it when it’s spoonfed to them by big corporate media.
This is going to be the roaring 20s all over again, ending in a collapse and then gangster capitalism coming in to mop up the leftovers at fire sale prices. Average Joes and Janes won’t know what hit them.
Look at 2016-2020. The guy in the white house claimed over and over it was INFRASTRUCTURE WEEK! Never happened.
Then he was going to bring back manufacturing! Never happened until Biden got in and did the hard work with the CHIPS and IRA acts and other things that got the ball rolling. Added a lot more than his predecessor even tried to, yet the media ignored it and blamed the pandemic based inflation on the one who was actually fighting to tame it.
What’s going on is the return of the robber barons. They’re trying to dismantle government to convince people that it doesn’t work, while preying on their fears and bigotry. They’re not even trying to hide it anymore.
Then when things collapse, the oligarchs will come in and privatize the functions they destroyed that people who voted for them finally realize are needed. But you’ll pay much more for it this time around. It’s happened/happening with medical care, the felon’s buddies are in line to take over the weather service for their profit, the postal service is being teed up to privatize, social security and medicare/medicaid, and VA services are in the cross hairs to be cut, and the list goes on.
Big business may be efficient at trying to avoid regulations, but they’re also effective at reaming you when they take control and do their best to limit competition.
Look at Hungary and Russia to see how this works. Those are their models.
Right, so if all that’s true, i’m sure the budget won’t include trillions of dollars in tax cuts for the ultra-wealthy and corporations. And if it does contain those tax cuts, I’m sure you’ll come right out and admit that you’ve been being lied to all along, right?
Ben, you know those tax cuts will pay for themselves with growth, right? /s
The #1 indicator that someone doesn’t know what they’re talking about: “Other nations put their interests first. It is about time that America does so”
LOL. EVERYTHING America does is to promote its interests. There’s a good reason a whole bunch of the world hates us.
Another laugher: “We need to bring business back to America ”
True! Since America’s GDP is only the world’s largest, ya, we just don’t have any business here.
One can only hope we return to 5% + 28 day T Bills
Although i did add a 6 week tranche at a slightly higher than 28 day yield…
Those who locked in 4.8% for 3 years are looking positively prescient…. At least for the time being!
I have a CD at 5% into 2027. I also have one at 1.9% thru 2031. Regrets, I have a few….
Mr. Wolf’s question: “Is This the Beginning of the Second Wave of Inflation?”
Answer: Yes. Information source having lived through the 1970s and 1980s; wave after wave of roller coaster inflation always elevated at evenvthe lower spots and yes it gets worse.
Wisdom: Old age wisdom is seeing the same thing again, while the pundits for the self serving economic interests say this time is different. However, those same self serving interests are completely transparent as the facts don’t match their words. Sort of like watching a foreign news broadcast about their local country.
Old age is learning that everything taught about society and the economy was wrong. It takes a whole lifetime to unlearn that nonsense learned as a child.
I graduated college in 2005 with a degree in finance. I remember getting into the real world and working my first job at a major and thinking this isn’t what I learned! Nothing they were doing at that time made any sense. I’ve learned more through reading Wolf’s articles. Thanks Wolf!
Same here but 09 grad.
Always cracks me up remembering the business professors who worshipped at the altar of Jack Welch. Those lessons didn’t age well.
A great philosopher once said – Free your mind and your ass will follow
Smart observations. Reminds me of the way Fed rate changes were always “baked in” several months in advance by corporations and stocks. For some mysterious reason the “baking” always worked in the direction that would raise profits and shares, and it never “unbaked” if the predictions turned out wrong.
Inflation, inflation, more inflation…just what our “drunken sailors” need right now. $20/gallon gasoline and $10 beers (at the pub)
Of course, this is ON TOP of home prices that have gone ballistic, home and auto insurance that has skyrocketed, out of control medical costs, increased food prices. exorbitant auto prices. What have I missed?
Yeah, just what my psychiatrist ordered for my paranoid schizophrenia, bipolar, anti social disorder – more inflation! Yippee!! ☹️😡🤪
Companies always try to front run price increases. I think in one form or another these tariffs are going to be implemented. Whether they stick or not is another thing. Unfortunately once companies raise prices they rarely reduce them. If these prices can’t be passed through to the customer then I would think that signals the early stages of a recession. The choice seems to be between inflation and recession with these current economic policies.
Tariffs best use case is to protect domestic industries. The current application may lead to currency wars and if the US ends up on the wrong side of this it could be the beginning of the end for the US dollar being the global reserve currency.
“The choice seems to be between inflation and recession with these current economic policies.”
Once inflation becomes sticky, I think this is usually the only two options regardless of policies.
Its amazing that inflation and borrowing costs drive so much of the system.
The announced re-armament of Europe, which will enable all the EU politicians to say oh we have to because they are so desperate to borrow and spend more, has -already- put another 3bn on the UK’s debt servicing costs (or around 0.1% GDP it will be the same for the USA proportionately I guess). The EU is proposing to compete to take almost a trillion of debt.
Although I think Trump is taking the best course with tariffs, and I guess he hopes that reducing government costs will give him leeway to moderate the ensuing inflation, its hard to see how a hard bout of inflation is going to be avoided.
I was in the supermarket the other day listening to the cashier talking to a friend about fish and chips, she was saying that they used to be a cheap staple now so expensive, I wanted to say because GBP has lost half its value since 2010, but as its her private pension gone I just held my tongue.
One day inflation will go too far really, listening to the cashier who was still at the stage that goods were becoming more expensive reminded me of the 1929 shoe shiner giving out stock tips.
…ongoing reduction of global fish stocks (not stonks), have no effect on supply/demand pricing, however…(/s).
may we all find a better day.
Perhaps last year’s rate cuts are the culprit? Rate changes operate with a policy lag, which would explain them kicking in over the next several months in the form of higher inflation.
In the bond market, lately, the winner in the battle between possible inflation and possible recession is clearly being won by possible recession. It looks like it reversed around January 20, 2025. I am sorry to see long-term bond interest rates being governed by the stock market, but it appears to be what is happening. Interesting times, so to speak.
are long-term bond rates being governed by the stock market, or are they both responding to the same thing?
What unexpected event did the market learn about on January 20?
“In the bond market, lately, the winner in the battle between possible inflation and possible recession is clearly being won by possible recession.”
Maybe in the short term. In the long term(say 5 years back) the trend towards higher TNX yields looks like it’s on solid footing to me.
10-year yield has risen for the second day in a row, by 12 basis points total. If you look at a 3-year chart, the 60 basis point decline from the Jan 5 high through Mar 3 low was a lot smaller than the prior two major declines (starting Oct 2023 and April 2024), each over 100-plus basis points.
Hussman has a chart of the 10y bond yield and what it does after the start of a recession. Contrary to popular belief, yields do not drop until after the 16th month. and if the inverse relationship between EFFR and yields holds true and they drop short rates, bond yields may actually rise. Payback for decades of financial repression
I haven’t seen the specific chart you reference, but I keep a 10 year vs. core CPI chart on my desktop. Not only do yields not drop in an orderly fashion after a bout of inflation, they generally exceed peak core CPI at some point down the road. Typically in a 15-25 month lag, close to your reference.
This ain’t even halftime boys and girls, there’s a long way to go.
Apr 24 was still “the Fed must cut!” mania…
It appears the recent drop was Trump related…
Now the channel is back turned back to Inflation?
I’m patient. Since 1970 the FED has had to raise rates in the face of inflation at least three times after pausing or lowering slightly prior to…. ’73-’74, ’80-’81 and ’95-’99/’00. So, there is precedent. Maybe there will be a significant recession forcing the FED to lower? The great thing about T-Bills is that I sleep well while the FED pays off my mortgage. This harvest season has been wonderful…cruising around the property picking citrus for my Kuvings juicer, grazing on various other offerings and now watching the Spring flowering for the avocados. Finally La Nina is past and the farm is back on track. Standing between the branches of a flowering avocado tree in the morning with its overpowering fragrance and the honey bees just mobbing it…one of life’s memorable moments.
I can live with 4.3%. I might not like what a 7% T-Bill world looks like…
Nah, it’s just transitory….caveat is that the transitory timeline is open for interpretation. Just like Dinosaurs was also transitory in history and same as human species down the road.
Well,I have thru the years as I got older learned to live with less stuff,of course,have accumulated all the tools/hunting& fishing gear ect. I need for a lifetime(hopefully!).
I while not cheap am frugal,always looking for a deal and also learning to live now with less,that said,I do need something always go for quality over price.
I still eat well but have learned how to make nice meals with less monies,really not feeling deprived at all and am actually grateful.
We think and like alike.
Good to know someone like me out there 🙂
Yes, yes it is. It’s our springtime of 1979…
Hedge accordingly.
I want to hold a TRANS rally in my town – which would advocate for the underprivileged TRANSitory inflation I want this savage persistent inflation to go away! Back with the TRANNY!
Profit margins increased from 12% pre-pandemic to 18% now.
I don’t expect it to stop. There are lots of way to disguise price increases (shrink-flation, lower quality, etc.)
https://wolfstreet.com/2024/09/26/corporate-pricing-power-and-therefore-inflation-not-vanquished-says-renewed-spike-in-corporate-profits-in-most-industries/
I wish there was more discussion about the psychology of inflation. I often think about how cultural and social factors influenced the inflation of the 70s. The “keeping up with the Joneses” mentality. It’s not just oil prices and supply chain issues that influence prices, it’s much more rooted in greed, fear, despair etc. And I really need a new car now that I’m thinking about it
Well I did meet someone who recently paid over $100k for a beautiful Chevy Silverado pickup. (I was wondering how many people would pay up like that?!) Unfortunately he’s complaining about the $1600+ a month truck payment that he has for the next 8 years. He was using it to earn some extra cash driving for Uber. Let’s see how many consumers step up and and do something similar. Just not me.
wait till you hear what people paid for houses and how big their payments are. And they can’t even drive their house to Starbucks.
Someone who buys a 100k car but has a payment is just poor working paycheck to paycheck.
He needs to go into treatment
But but but, the media said that inflation is caused by greedy companies raising their prices to oppress poor people! /s
“correlation does not imply causation”
What you say about pricing power is spot on.
Inability to set a profitable price due to fierce competition takes all the fun out of being in business.
Competition is a good thing when you’re finding ways to reduce the quantity of labor in a product. Creativity, dedication, and hard work wins.
Fighting to reduce the price of labor stinks. When you’re outgunned by cheap labor, it’s demoralizing.
We have never in history needed a massive recession so badly. We need a meltdown in speculative non-assets like crypto. We need sanity to return.