MNI INTERVIEW: US Service Inflation Seen Staying Elevated-ISM

U.S. service costs will remain elevated for most of this year as firms resort to extraordinary incentives to draw in new workers, ISM survey chair Anthony Nieves told MNI Thursday.

Prices in the monthly ISM services survey rose 0.2 points to its third-highest reading ever at 82.5 in December as backlogs continue to grow. "It will take two or three months for pricing to come down but it will still be high; well above 50. We're not going to see any contraction of pricing anytime soon."

"We're definitely seeing wage pressure across the board and people have more options now," he said. "The cost of living adjustments are there," he said, noting some businesses are paying people to fill out job applications and workers are seeking higher wages because housing "rents are astronomical right now."

December's ISM services report continued to show demand outpacing supply though there were some signs of easing bottlenecks. The headline index fell 7.1 points to 62.0 and the new order reading fell 8.2 points to 61.5. Nieves said he is expecting the headline index to move lower over the next two months as the survey picks up impacts from the Omicron variant.

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Companies are still struggling to hire workers amidst a restricted labor pool, with the employment index down 1.6 points from the prior month to 54.9. "We'll see some continued growth in employment, but [Omicron] might impact us," he said.

Those trends suggest Friday's payrolls report won't show a major gain, he said, pointing to a good correlation between the ISM employment index and the government figures.

"We won't get to pre-pandemic levels anytime soon," he said. "Everyone just keeps saying the same thing: It's a restricted labor pool for right now." Officials at the Federal Reserve have have started to say that the labor market is at or nearing maximum employment.

The head of ISM's factory index told MNI earlier this week the new Covid variant will also contribute to manufacturing backlogs.