By Lucia Mutikani
WASHINGTON (Reuters) – Activity in the U.S. services sector accelerated in December, but a rise in prices paid for inputs to near the highest level in two years pointed to high inflation, in line with the Federal Reserve’s projection for fewer interest rate cuts this year.
The Institute for Supply Management (ISM) said on Tuesday that the non-manufacturing managers index (PMI) rose to 54.1 last month from 52.1 in November, reflecting strong demand. Economists polled by Reuters had forecast the services PMI would rise to 53.3.
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A PMI value above 50 indicates growth in the services sector, which makes up more than two-thirds of the economy. The ISM considers PMI readings above 49 over time as a general indication of an expansion in the overall economy.
The PMI contributed to so-called hard data, including consumer spending, that pointed to solid economic performance in the fourth quarter. The ISM said last week that the manufacturing PMI rose to a nine-month high in December.
Business sentiment has brightened in the wake of President-elect Donald Trump’s election victory in November, amid hopes for tax cuts and a low regulatory environment. But there are concerns that other policy commitments from the new Trump administration, including higher tariffs on imported goods and mass deportations, could fuel inflation and stifle growth.
The new order measure from the ISM survey increased from 53.7 in November to 54.2 last month. The business activity index jumped to 58.2 from 53.7 in the previous month.
As demand increases, the costs of inputs also increase. The measure of prices paid for service inputs rose to 64.4 from 58.2 in November, the highest since February 2023.
Progress in reducing inflation to the Fed’s 2% target remained stalled in a resilient economy for much of the second half of 2024. The US central bank cut rates for the third time in a row last month, cutting the key daily rate by 25 basis points to a range of 4.25%-4.50%.
However, the Fed forecast only two cuts in borrowing costs this year compared to the four it forecast in September, recognizing the resilience of the labor market and the broader economy. The Fed’s policy rate was raised by 5.25 percentage points in 2022 and 2023 to curb inflation.
The measure for service sector employment was little changed in December at 51.4. It is not a good predictor of service sector wage figures in the government’s closely watched employment report. Job growth likely moderated last month as the boost from the end of disruptions from hurricanes and strikes by factory workers at Boeing and another aerospace company faded.
A Reuters survey shows nonfarm payrolls likely rose by 154,000 jobs in December after rising by 227,000 in November. The unemployment rate is expected to remain unchanged at 4.2%.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)