ISM Services: Prices-Paid Hits 4-Year High (74.0) as Fuel Costs Dominate — Inflation "Could Remain Elevated Into 2027"

ISM Services: Prices-Paid Hits 4-Year High (74.0) as Fuel Costs Dominate — Inflation "Could Remain Elevated Into 2027"

New subject (Oct 5, the release): The September ISM Services PMI landed Monday and the headline looked benign — 54.9, down from 55.4 in August (Reuters consensus: ~55.2), still firmly in expansion and "at a level consistent with strong economic growth in the third quarter." The inflation content was not benign. The survey's prices-paid gauge jumped to 74.0 from 72.6 — the highest since July 2022 — and the supply chain behind it is visibly stretching: supplier deliveries rose to 53.2 (slower deliveries for a 22nd consecutive month), and order backlogs hit their highest level since July 2022, growing for an eighth straight month.

The driver is the energy shock. ISM's Services Business Survey Committee chair Steve Miller: "tariffs and fuel cost impacts were the most cited issues impacting respondents' supply chain," noting "fuel costs were mentioned twice as often as any other single issue impacting performance¹." Respondents were blunt: farming businesses said expensive diesel had "increased the cost of freight dramatically," retailers said "shipping containers from overseas are double the cost, causing price increases," and nitrogen fertilizer prices were "near record highs" (see Diesel Squeeze: Record $6.53, OPEC+ Holds Quotas, Iran Keeps Hormuz Shut — No Relief for Pump, Truck and Food Costs).

Reuters' read: strong domestic demand "stretched supply chains and pushed a measure of prices paid by businesses for inputs to its highest level in more than four years, suggesting inflation could remain elevated into 2027." The two ISM surveys together (manufacturing prices-paid hit 77.9 last week — see ISM: Factories Still Expanding (54.5) but Prices-Paid Jumps to 77.9 — the War Premium and Tariffs Hit the Factory Gate) "pointed to higher inflation down the road." Oxford Economics' Matthew Martin drew the hawkish conclusion: "The prices index continues to trend markedly higher, and the uptick in supply chain stress and backlog of new orders suggest price pressures are building. With underlying growth strong, the economy can withstand additional policy tightening."

But the policy odds moved the other way. Cooler July/August inflation readings and September's +29K payrolls have cut CME FedWatch October hike pricing to ~26% by Monday, then 19–23% by Tuesday (down from ~71% a week earlier), while December still carries a materially higher probability of at least one more hike (see PPI Shock: +1.3% m/m Is the Biggest Monthly Gain Since March 2022 (6.3% y/y) — Diesel +115% y/y at the Producer Gate — but Markets Keep the October Hike at ~30% and December Is Still the Priced Meeting). One labor bright spot: services employment climbed back to 50.1 from 47.8, though some firms reported they were "restructuring due to efficiencies gained using AI tools."

What it means: the goods-and-energy inflation wave is now visibly migrating into services input costs — the sector that is more than two-thirds of US GDP. Growth is strong enough (new orders 59.8, backlogs multi-year highs) for firms to keep absorbing and passing through costs, which is exactly the setup that keeps inflation above target into 2027 even as the labor side of the Fed's mandate deteriorates. The Fed's October pause looks safe; the December meeting is where this services-price signal collides with the September CPI print (Oct 14).