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Services Inflation Sticky Despite Tariff Peak
4 Dec
Summary
- Services inflation may persist due to underlying wage pressures.
- Tariff impact on services prices appears to have peaked.
- Tight labor market and subdued growth will drive future inflation.
The peak of tariff-related pain in U.S. services may be behind us, but persistent inflation is still a concern. Jefferies economists note that while the prices paid component of the ISM Services PMI has fallen, the underlying wage and labor backdrop continues to point towards sticky price pressures rather than a clear disinflationary trend.
This situation arises as the services sector shows signs of growth, with the latest ISM Services PMI hitting its highest reading since February. However, the economists suggest that tariff pressures, while significant, have likely peaked. Factors like reduced uncertainty, fiscal tailwinds, and lower interest rates contribute to an optimistic outlook for growth.
Despite these positive indicators for growth, the threat of faster wage growth means services inflation is unlikely to recede quickly. A tight labor market, characterized by weaker labor supply due to limited immigration and demographic trends, is expected to dominate inflation concerns moving forward. This subdued labor force growth will continue to fuel price pressures in the services sector.
