MNI INTERVIEW: Firms See Year-End Inflation In 6%-7% Range-ISM

U.S. service sector prices could take longer-than-expected to ease as supply constraints make inflation pressures the industry's top challenge, Institute for Supply Management services chair Anthony Nieves told MNI Friday, adding he expects continued growth through the year.

"Based on recent forecasts firms see price growth in the 6% to 7% range and even higher on the manufacturing side, through the end of the year," he said. "Normally there would be strategic cost management and we wouldn't see prices going above that 3%-mark in any kind of forecast."

Prices in the May services survey dipped to 82.1, down 2.5 points from April which then showed the survey's highest reading ever. The survey showed 72% of service firms reporting higher prices, up from 64% in February, while only 1% registered lower prices.

"We're not going to see it anywhere in the 60s anytime soon," Nieves said about the prices subindex, while acknowledging it could fall into the upper 70s in coming months.

The ISM services survey weakened by more than anticipated in May, with its headline composite declining from 57.1 in April to 55.9, the lowest reading since February 2021. A reading below 50 suggests a contraction.

MODERATING DEMAND

But the ISM services chair also sounded a similar note to the manufacturing chair earlier this week that saw a rush of ships in coming months from China as it opens back up following Covid lockdowns that could provide a boost to the PMI. "It might increase but I wouldn't expect this big bang out of it," Nieves said.

"The supply constraint is still there, although it's eased up a little bit, but it's still there, and also labor is an issue. Those are the things that are affecting the sector right now." The decline in the headline can be explained in part by the supplier delivery times index, which fell 3.8 points in May to its lowest reading since February 2021, he said.

The New York Fed's Global Supply Chain Pressure Index has recently pointed to a fresh inflationary impetus in coming months. (See: MNI INTERVIEW: Supply Chain Stress Hints At More Inflation)

Nieves also blamed supply constraints for the 4.6ppt fall in business production to 54.5. "What's encouraging though, as we see what's in the pipeline, new orders increased to 57.6," he said. New orders were up 3 points in May.

Still, the ISM chief pointed to consumer sentiment decreasing, citing the University of Michigan survey. "There's definitely been a moderation of the demand for sure, not significantly because we're still seeing continued growth," he said.

"Respondents expect continued growth throughout the year, and the potential headwinds would be along the lines of what is going on in Ukraine," he said. "What would be the geopolitical fallout from that and how does it affect the supply chains?"