The latest ISM report on the U.S. services hints at the growing risk of stagflation, complicating the Fed’s calculus on interest rates.
Macro analyst Otavio Costa described the data as “deeply stagflationary,” noting that the underlying details are far more alarming than the headline numbers suggest.
At the heart of the concern is a stark divergence within the ISM Services PMI.
The prices paid component surged to 70, signaling rising inflation, while the employment gauge fell below 50, which is a threshold that separates expansion from contraction.
The combination points to rising service-sector costs alongside shrinking job growth, a defining feature of stagflation, when high inflation coexists with economic stagnation.
Overall, the September ISM Services PMI dropped to the breakeven level of 50 for the first time since January 2010, underscoring the slowdown.
One survey respondent from the public administration sector cited “continuing concern about future economic conditions, tariffs, and their impact on increased prices.”
The findings carry significant weight as services make up more than three-quarters of U.S. GDP.
When paired with mounting inflationary pressures on the goods side, reflected in rising commodity prices, the data suggest that inflationary forces across the economy are intensifying.
The Fed acknowledges both the ‘stag’ and the ‘flation,’ then cuts rates anyway
While he avoided the term itself, Fed Chair Jerome Powell appeared to acknowledge the dual threat of rising unemployment and persistent inflation during his remarks at the Jackson Hole Symposium in late August.
Despite those warnings, the Fed moved ahead with a rate cut in September, its first of the year, a decision that Bloomberg economist Anna Wong described as rife with “contradictions.”
Powell framed the move as part of a “risk management” approach, signaling that policymakers are attempting to balance the danger of tightening too much — and worsening labor market weakness — against the risk of letting inflation remain elevated.
The policy shift comes as stagflation fears mount among global investors. In a recent Bank of America Global Research survey, 70% of respondents said they expect a stagflationary environment to take hold within the next 12 months.
So far, however, those concerns have yet to be fully reflected in stock markets.
“Stagflation is in the mind of the market, but not the price,” said Marie-Anne Allier, fixed income portfolio manager at Carmignac, in comments to Reuters.
Adding to the uncertainty, investors are navigating a data blackout as the federal government shutdown halts key economic releases.
The next Consumer Price Index report, originally scheduled for Oct. 15, has been postponed, leaving markets with limited visibility into the latest inflation trends.
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