This article was written by Wolf Richter and originally published at Wolf Street
Services are about two-thirds of the economy. During the Pandemic, discretionary services such as travel and entertainment have been hard hit, and consumer spending on services in February was still down 5.2% from a year ago. But the services sector is enormous, ranging from healthcare to tech, and demand has been strong in many segments, and is coming back in others. Amid backlogs and shortages, input prices are soaring and companies are able to pass on those higher prices. The Fed might refuse to acknowledge it, but everyone else is seeing it.
“The biggest concern is inflation, with price gauges hitting new survey highs in March as demand often exceeded supply for a wide variety of goods and services,” reported IHS Markit in its Services PMI today.
“On the price front, input costs soared in March. The rate of inflation accelerated to the fastest since data collection for the services survey began in October 2009,” the report said.
“Subsequently, firms sought to pass on higher costs to clients through a sharper rise in selling prices,” the report said.
“A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of charge inflation was the quickest on record,” the report said.
These types of price pressures in the services sector were also reported today by the Institute of Supply Management’s broad ISM Services Report on Business, whose index for prices paid for materials and services increased in March at the steepest rate since 2008.
All 18 services industries in the index reported higher prices. The index has now shown price increases for the 10th month in a row, after the price declines in April and May last year.
Values above 50 indicate that companies are paying rising prices in the current month compared to the prior month, values below 50 indicate that they’re paying lower prices than in the prior month. The higher the value above the gray line, the sharper the acceleration in prices. The value of 74 in March indicates the sharpest acceleration in prices paid since July 2008 (data via YCharts):
All 18 industries in the index reported higher prices in March. They were, in that order: Construction; Wholesale Trade; Utilities; Mining; Real Estate, Rental & Leasing; Management of Companies & Support Services; Public Administration; Retail Trade; Transportation & Warehousing; Finance & Insurance; Other Services; Accommodation & Food Services; Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Educational Services; and Information.
One of the executives on the panel, whose company is in the construction business, reported:
“Residential new home construction demand continues to outpace supply. Building material delays, discontinuations and shortages are beginning to develop. Shipping delays at the L.A. and Long Beach ports have contributed to longer lead times. Cold weather in Texas has hurt several component manufacturers for building materials. We have encountered the ‘perfect storm’ for building material shortages and price increases.”
An executive whose company is in the information sector, reported:
“Resin/oil price increases are beginning to filter down to products that we procure. In addition to price increases, we are also seeing longer lead times as supply chains pivot to find cheaper supply options.”
What this shows is that price increases are now spreading across the services sector, that companies are broadly paying higher prices and that they’re broadly able to pass on higher prices as their customers have become more accepting of price increases. The entire mindset has changed.
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