Latest Services Data Shows Where Core CPI Is Heading

*The May service PMI reports point to accelerating growth in that part of the economy.

*The service PMI reports also reinforce wage pressure found in ADP’s May employment report and explain ADP’s softer May job figure.

*Wage pressure and other input costs point to rising output costs, meaning inflation is not backing down as fast as some expected.

With the receipt of the May services PMI reports from S&P Global and ISM, we’ve got a few more of the early-May economic data puzzle pieces. Unlike the diverging pictures for the May manufacturing PMI data, today’s reports clearly show that the services economy accelerated in May with business activity and output growth jumping considerably. New order activity also picked up in both reports, suggesting the services economy should continue to propel the overall economy.

We did see a bit of mixed picture on the employment front with ISM finding job growth contracted during May but did so at a slower pace in April. From S&P’s vantage point, its findings showed that employers continued to lower staffing levels in May. Slight job cuts were mentioned but the comment that stood out to us was: “The drop in workforce numbers often reflected the non-replacement of leavers.”

When we look at S&P’s comments on wages, we can understand why.

“Higher wages for existing workers, meanwhile, was the key driver of a further sharp increase in input costs, with the rate of inflation quickening from that seen in April," the report read. "In turn, charges also rose at a faster pace.”

As we suspected, the ongoing wage pressure seen in Wednesday morning's May employment change report from ADP is having an impact.

Outside of wages, other input costs were also on the rise.

“The pace of input cost inflation quickened from April and was sharper than the pre-pandemic average," per the report. "Panelists also reported higher shipping costs.”

And this led to a pick up in May selling prices, giving us another reason to think inflation didn’t back down to a meaningful degree during the month. ISM’s prices sub-index for its May services PMI backed off slightly to 58.1 from 59.2 the month before but remained well above the expansion-contraction line at 50. While the sequential comparison is favorable, looking back a bit further we see the data has jumped around quite a bit, giving another reason why the Fed will want to see more “good data” before cutting rates.

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We can sum up the May data received so far this week as follows: The overall economy continues to grow at a good pace with the same being said for job creation, but wage and other inflation pressures are not falling as many expected. This means that there is a high probability that we do not see much improvement in the year-over-year core CPI data for May that will be out next week. The current inflation nowcast model for the Cleveland Fed pegs May core CPI at 3.55% on a year-over-year basis, down only slightly versus the 3.6% print for April.

At the time of publication, TheStreet Pro portfolio had no positions in any securities mentioned.