WASHINGTON (Reuters) — US services sector activity accelerated in December, but a surge in a measure of prices paid for inputs to near a two-year high pointed to elevated inflation, consistent with the Federal Reserve's projection for fewer interest rate cuts this year.
The Institute for Supply Management (ISM) said on Tuesday that its nonmanufacturing purchasing managers index (PMI) increased to 54.1 last month from 52.1 in November amid strong demand. Economists polled by Reuters had forecast a rise in the services PMI to 53.3.
A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM views PMI readings above 49 over time as generally indicating an expansion of the overall economy.
The services activity joins consumer spending and other hard data that have suggested solid US economic performance in the fourth quarter. The manufacturing PMI increased to a nine-month high in December, the ISM said last week.
Business sentiment has brightened in the aftermath of President-elect Donald Trump's election victory in November, thanks to hopes for tax cuts and a low regulatory environment.
But there are concerns that other policy pledges from the incoming Trump administration, including higher tariffs on imported goods and mass deportations, could inflame inflation and stifle growth.
The ISM survey's new orders measure increased to 54.2 last month from 53.7 in November. Its business activity index shot up to 58.2 from 53.7 in the prior month.
With demand rising, so did the cost of inputs. The survey's prices paid measure for services inputs jumped to 64.4, the highest reading since February 2023, from 58.2 in November.
Progress lowering inflation to the Fed's 2% target stalled for much of the second half of 2024 amid a resilient economy. The US central bank last month delivered a third consecutive rate cut, which lowered its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range.
The Fed, however, has projected only two reductions in borrowing costs in 2025, compared with the four it had forecast in September — an acknowledgement of the resilience of the jobs market and the economy in general. The Fed's hiked rates by 5.25 percentage points in 2022 and 2023 in an effort to quell inflation.
The ISM survey's measure of services employment was little changed at 51.4 in December. It has not been a good predictor of services payrolls as reflected in the government's closely watched employment report. Job growth likely moderated in December as the boost from the end of disruptions from hurricanes and strikes by factory workers at Boeing (BA) and another aerospace company faded.