Price pressures in the service sector are once again becoming a core variable in the Federal Reserve's policy path.

The latest survey of business leaders released by the Federal Reserve of New York on Friday shows that in October, the increase in sales prices for service sector companies rose to the fastest level since 2022, input costs continued to rise strongly, and supply conditions continued to deteriorate.

At the same time, enterprises' pessimism about business prospects has clearly intensified, with the overall business activity index falling by 12 points to -20.7 from last month, marking the weakest reading since March.

The above survey results corroborate the current high and persistent inflationary trend. Affected by factors such as the continuous impact of the Trump administration's tariff policies and the rise in energy costs due to conflicts in the Middle East, price pressures have not subsided for a long time. The Federal Reserve raised interest rates last month on the grounds of inflation, and the market generally expects it to act again within this year.

Service industry price pressures rise to near three-year highs

According to the latest survey of business leaders by the Federal Reserve of New York, in October, the growth rate of sales prices for service sector companies accelerated to the highest level since 2022, input price increases also remained strong, while supply availability continued to deteriorate.

The report also indicates that the surveyed companies' evaluation of the current business environment is "well below normal levels," with weak capital expenditure plans, and companies are becoming increasingly pessimistic about future prospects.

This result resonates with the data released by the government during the same period – the monthly increase in import prices in September reached 1.1%, far exceeding market expectations, once again confirming that inflationary pressures have not substantially eased.

It is worth noting that the pessimistic sentiment reflected in this survey is in clear divergence with other macroeconomic data. Currently, overall economic activity in the United States remains strong, with the unemployment rate stable at a low level, and investment demand related to the tech industry also continues to be robust.

Also within the Federal Reserve System of New York, the Empire State Manufacturing Survey for October ( Empire State ) released on Thursday presented a distinctly different picture – the overall business conditions index rose to a level near its highest in five years, despite also facing “high” input and sales prices as well as challenges on the supply side.

Fed officials closely monitor inflation in the service sector

At the policy level, Federal Reserve officials have expressed clear concerns about the persistently high inflation in the service sector.

Chicago Fed Chairperson Austan Goolsbee said in an interview on Wednesday that the consumer inflation report released that day was "disheartening," and pointed out that "if we look at each component separately, there are almost no signs of improvement in service sector inflation." He emphasized the need to "keep a close eye on this part of price pressure, as it does not truly come from supply shocks."

Fed Chairman Powell deliberately kept his remarks about future policy paths vague on Thursday evening. He said, "I will not predict the outcome of the meeting... I don't think it is appropriate to say what actions I might take at the remaining meetings this year at this time."

Nevertheless, given that inflationary pressures prompted the Federal Reserve to raise interest rates again last month, market expectations for another rate hike within the year remain strong.

Increasing supply pressure has become a new concern.

Apart from prices, issues at the supply side cannot be ignored either.

The New York Fed investigation clearly indicates that the issue of supply accessibility faced by service industry firms is worsening, and it is expected that this situation will further deteriorate in the future.

The continuous disruption to the supply chain caused by tariff policies, coupled with the upward pressure on energy costs due to the situation in the Middle East, together constitute an important backdrop for why current inflationary pressures are difficult to dissipate quickly.

For investors, the stubbornness of inflation in the service sector means there is a risk of further delays in the Fed's policy shift, and interest rate-sensitive assets may continue to be under pressure.

Edit / Liam

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