WASHINGTON, Sept 3 (Reuters) - U.S. services sector activity picked up in August as strong demand lifted new orders to a 3-1/2-year high and drove input prices higher, suggesting inflation could remain elevated and compel the Federal Reserve to hike interest rates before the end of this year.
The Institute for Supply Management said on Thursday its nonmanufacturing Purchasing Managers' Index advanced to 55.4 last month from 54.1 in July. A reading above 50 indicates growth in the services sector,
which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the PMI would climb to 54.2. The current PMI level is consistent with solid economic growth in the third quarter.
The survey's measure of new orders received by services businesses surged to 60.9, the highest reading since February 2023, from 57.2 in July. The strength in orders aligns with robust domestic demand, which is partly being fueled by an artificial intelligence spending boom.
With demand showing no signs of cooling, supply chains remained stretched last month. The survey's measure of supplier deliveries eased to 51.3 from 52.8 in July. A reading above 50 indicates slower deliveries. That measure has slowed for 21 straight months, pushing up input prices.
Supplier delivery performance was initially impacted by tariffs on imports and most recently by the U.S.-Israeli war with Iran, now in its seventh month.
The survey's measure of prices paid by businesses for inputs increased to 72.6 from 70.3 in July, suggesting inflation could stay above the U.S. central bank's 2% target for a while. Fed Chairman Kevin Warsh said last week the central bank will "have work to do" if policymakers don't get the confidence they need that inflation is falling to the 2% target.
Financial markets are pricing in a roughly 64% chance that the Fed will raise its benchmark overnight interest rate by 25 basis points at its September 15-16 policy meeting, according to CME Group's FedWatch tool. That rate is currently set in the 3.50%-3.75% range.
Despite the surge in orders, services sector employment remained subdued last month. Economists say businesses are reluctant to add to headcounts because of policy uncertainty. The survey's employment sub-index was little changed at 47.8, suggesting a possible downside risk to nonfarm payrolls for August.
A Reuters survey of economists expects the Labor Department on Friday to report that payrolls rebounded by 56,000 jobs last month after a surprise decline of 23,000 in July. That rebound would partly reflect a recovery in local government education payrolls. Some economists are, however, bracing for a second straight month of job losses after Temporary Protected Status for hundreds of thousands of Haitians recently ended, impacting their work authorization.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
