The Inflation Dilemma: Why Inflation in the Service Sector Is Still Surging

The Inflation Dilemma: Why Inflation in the Service Sector Is Still Surging

In a new report, it has been revealed that while inflation in goods appears to be waning, it continues to surge within the service sector. The S&P Global Flash US Composite PMI for July provides insight into “sticky” inflation within this sector from the perspective of various companies. Both input costs and charge inflation remain hot for service companies, with further analysis presenting the companies’ experiences and perspectives on continued growth and inflation.

Key Takeaways and Inflation Dynamics

  • The services sector is the main driver of inflation in the USA, as inflation in goods subsides.
  • The culprits? Increasing operating costs, with wages being a notable factor. The costs are subsequently shifted to the consumers, boosting output charge inflation.
  • This situation is labeled as ‘sticky inflation’ in the services sector. In other words, inflation isn’t easily dismissed, despite lower energy prices and stable goods prices.

Have you ever wondered about the real forces influencing inflation in our economy? You might be surprised by the recent S&P Global Flash US Composite PMI findings. It’s true that inflation in goods seems to be on a downward trend. But is the same happening in the services sector? Far from it!

Understanding the Stickiness: Inflation in the Service Sector

From a corporate standpoint, inflation comes in two forms – input costs, including wages, and charge inflation – the prices companies charge their customers. It appears that for service companies, both types are escalating.

The PMI surveys 800 US firms monthly and provides an unvarnished look at what executives at these firms are experiencing. According to the July PMI data, the services sector is fueling inflation, whereas the manufacturing sector reports dampened inflation. Why should we be concerned? The answers lie ahead.

Service firms face increased operating expenses, chiefly wage costs, unlike the manufacturing sector. So, who is absorbing these escalating costs? Unfortunately for consumers, the answer is that firms are transferring these costs onto us.

The report coins the term ‘sticky inflation’ to describe the state of affairs in the service sector. High inflation has proven difficult to tame and appears stubborn and unyielding. Why is service inflation so resistant to reduction? The culprit lies in the entrenchment of labor costs and adjusted consumer spending habits.

Investor Implications And The Inconvenient Truth

The persistent and ‘sticky’ inflation in the service sector presents several questions for investors. Does this call for a portfolio reassessment with an increased focus on the service sector? It’s a plausible option. As firms are effectively passing on increased costs to customers, it suggests robust pricing power. This may prove beneficial for firms offering non-discretionary services and those with high customer loyalty. They could potentially weather the inflation storm quite comfortably. Isn’t that akin to striking gold in an investment sense?

In conclusion, the news of overall inflation decrease due to declining goods prices and energy rates might have been celebrated prematurely. In contrast, the service sector narrates a different story – inflation is still rampant and refuses to retreat. If you believed inflation was conquered, it’s time for a reality check!

Free AlphaBetaStock's Cheat Sheet (No CC)!+ Bonus Dividend Stock Picks
Scroll to Top