By Lucia Mutikani
WASHINGTON, Oct 5 (Reuters) - US services sector activity slowed in September, with strong domestic demand stretching supply chains and raising prices paid by businesses for inputs, indicating that inflation could remain high into next year.
The Institute for Supply Management said on Monday its nonmanufacturing Purchasing Managers' Index fell to 54.9 last month from 55.4 in August. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds
of US economic activity. Economists polled by Reuters had forecast the PMI little changed at 55.2.
The PMI remained consistent with strong economic growth in the third quarter. The economy is being driven by robust domestic demand, mostly consumer spending and businesses investing in AI and related infrastructure.
The survey's measure of new orders received by services businesses eased to 59.8 last month after surging to 60.9 in August, which was the highest reading since February 2023. Supply chains are struggling to cope with the strong demand, a situation that has been worsened by the US-Israel war with Iran.
The Middle East conflict has raised energy prices and caused shortages of commodities that are shipped through the Strait of Hormuz. Diesel prices are at record highs and could start to exert pressure beyond the transportation and agricultural sectors, economists warned.
The survey's measure of supplier deliveries increased to 53.2 from 51.3 in August. A reading above 50 indicates slower deliveries. That measure has slowed for 22 consecutive months, boosting input prices. Supplier delivery performance was initially impacted by tariffs on imports.
The survey's measure of prices paid by businesses for inputs jumped to 74.0 from 72.6 in August. It mirrored a similar increase in the ISM's manufacturing survey. Combined, the two surveys pointed to higher inflation down the road and supported economists' expectations that the Federal Reserve would raise interest rates in December.
The Fed last month raised its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range, the first hike in three years, and flagged further increases in borrowing costs ahead. The chances of a rate hike this month were diminished by cooler-than-expected inflation readings for August and July as well as a sharp slowdown in nonfarm payroll growth in September.
The ISM survey showed a rise in services sector employment. That, together with an increase in manufacturing employment reported by the ISM last week, supported economists' assessment that the labor market remained stable despite September's underwhelming payroll gains. The survey's measure of services employment climbed to 50.1 from 47.8 in August.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)
