TOKYO, Aug 5 (Reuters) - Japan's services sector expanded at a slower pace in July as demand weakened and firms grappled with intense cost pressures, leading to the hottest inflation in selling prices since April 2014, a private survey showed.
The S&P Global final Japan Services Purchasing Managers' Index (PMI) fell to 51.2 in July from 52.2 in June, also undershooting the flash reading of 51.9. It marked a second consecutive monthly expansion but at a much slower rate than in the earlier months of 2026.
Readings above 50.0 indicate growth in activity, while those below point to a contraction.
New business growth hit the lowest in two years. Foreign demand for Japanese services declined for the fourth straight month, though the rate of contraction eased from June and May.
Cost pressures remained high, with input prices rising at a rate just below June's four-year high. Respondents cited a strong inflationary environment linked to the war in the Middle East, higher staff costs and a weak yen as key drivers, according to the survey.
Service providers raised their selling prices at the fastest pace since April 2014, when a rise in the consumption tax stimulated broad-based retail price hikes, as they sought to pass on higher costs to customers and protect margins.
Backlogs of work increased at the slowest pace in 17 months, signalling easing capacity pressures. Employment growth and business confidence also decelerated from June.
The broader Composite PMI, which includes both manufacturing and services, was little changed at 52.7 in July from 52.8 in June, as a surge in factory output to its highest since early 2014 offset the services sector slowdown.
"With rates of cost inflation remaining rapid across both manufacturing and service sectors, there was further pressure on firms to raise their own prices in order to protect margins," said Annabel Fiddes, economics associate director at S&P Global Market Intelligence.
"Official inflation measures could move higher and add pressure on the Bank of Japan to raise the policy rate in the coming months," Fiddes said.
(Reporting by Kantaro Komiya; Editing by Jacqueline Wong)
