MNI INTERVIEW: US Services Prices To Stay Higher Longer - ISM

U.S. service costs appear set to stay near record highs longer into 2022 than previously expected and may not see much quick relief from Fed interest rate increases in the spring, ISM services survey chair Anthony Nieves told MNI Thursday.

"It's definitely going to be more toward the latter part of the year in the third or fourth quarter at best," Nieves said about when to expect cooling prices. "Most of the prices will be buoyed in the first half of the year versus the second half, but it could take longer in the latter half of the year if we see any relief."

Prices in the monthly services survey eased by 1.6 percentage points to 82.3 in January but all 18 services industries reported an increase in prices paid in the month. The survey showed 63% of firms reporting higher prices, while only 1.7% registered lower prices.

Nieves said he is doubtful interest rate increases from the Federal Reserve would impact price pressures in the near-term. "This is more demand-pull inflation than anything and, while lower fuel prices down the road might help, I don't know how impactful rate adjustments will help."

Some Fed economists have suggested the omicron variant could prolong higher inflation as staffing frictions pressure supply chains. (See: MNI INTERVIEW: Omicron To Prolong High Inflation-Fed's Garriga)

STRUCTURAL FACTORS

January's ISM services report continued to show demand outpacing supply, even as the headline index fell 2.4ppts to 59.9, due mostly to structural factors, Nieves said.

"Omicron has been a factor but it is hard to pinpoint and I'd point to other deeper factors," he said. "What we're seeing here is we still have some logistical challenges with the supply chain. It's eased up slightly, but, based on supplier deliveries increasing 1.8ppts and inventories continuing to contract, there's still backlog. Demand is still exceeding supply."

The ISM services chair said he expects only an uptick in services growth in the spring, even as omicron shows signs of fading away. "There's still so many impediments in place right now," he said. "I feel that we're going to stay right around the same area, possibly in the low 60s or high 50s. We'll still see strong rates of growth going forward and we won't get down into the mid- to lower-50s by any stretch through 2022."

EMPLOYMENT COOLING

Companies are still struggling to hire workers, with the employment index down 2.4 points from the prior month to 52.3. Nieves said underlying employment growth is cooling. "It's not because of a lack of available jobs. It's definitely the restrictive labor pool and that that's going to be an ongoing challenge. The recovery for the labor market is not going to happen anytime soon."

Those trends suggest the next payrolls report on Friday won't show a major gain, he said, pointing to a good correlation between the ISM employment index and the government figures. "It's not going to have a strong jobs increase by any stretch." (See: MNI INTERVIEW: Jan Hiring Likely Fell-St Louis Fed Economist)

As such, the ISM services chief is expecting continued wage growth beyond what was seen in 2021. "There's choices out there, especially for the workers that are in high demand," he said. "There's a lot of flexibility that has to be put forth in order to retain these workers from jumping ship and going elsewhere. The employees are definitely in the driver's seat right now."