The U.S. service sector grew faster than expected in June as new orders rose, but a measure of the price businesses paid for inputs fell to a more than three-year low, suggesting that closely watched services inflation will continue to moderate.
The Institute for Supply Management (ISM) said on Thursday that its non-manufacturing PMI rose to 53.9 last month from 50.3 in May. A reading above 50 indicates growth in the service industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI rising to 51.0.
The survey was among a number of indicators, including housing starts, NFP and orders for durable manufactured goods, that have suggested the economy continues to grow despite mounting risks posed by a large interest rate hike from the Federal Reserve.
Higher borrowing costs have weighed on manufacturing, with ISM last week saying its manufacturing PMI remained stuck below the 50 threshold in June for the eighth month in a row.
The Fed has raised its policy rate by 500 basis points since March 2022, when it began its fastest monetary policy tightening campaign in more than 40 years.
With the labor market still tight and inflation rising, the U.S. central bank is expected to continue raising rates this month after skipping June.
A measure of new orders received by service businesses rose to 55.5 last month from 52.9 in May. There was a strong increase in exports. Despite rising demand, services inflation continued to moderate, which bodes well for the Fed's efforts to lower inflation to its 2% target.
Some economists view the ISM measure of prices of services paid as a good predictor of personal consumption expenditure (PCE) inflation. The Fed tracks the PCE price index for monetary policy. The annual PCE price index excluding food and energy rose 4.6% in May after rising 4.7% in April.
