Services Inflation Is Getting Worse as Growth Cools

Investors keep hoping inflation will stay a simple gas-price story. The latest data say otherwise. On April 6, the ISM reported that U.S. services activity slowed in March, with the non-manufacturing index falling to 54.0 from 56.1. At the same time, the prices-paid measure jumped to 70.7 from 63.0, its highest reading since October 2022. That is the ugly combination markets hate: slower growth, but hotter costs.

That mix matters because services inflation is the sticky part of the inflation problem. Goods prices can cool when inventories normalize. Services are different. They are tied to wages, transportation, healthcare, insurance, rent-linked costs, and day-to-day operating expenses that do not fade quickly. Federal Reserve Vice Chair Philip Jefferson said on March 26 that core services inflation outside housing had “largely moved sideways” over the past year, while Chair Jerome Powell said on March 18 that nonhousing services inflation had “basically moved sideways for a year” and called that lack of progress “frustrating.”

So the problem is not just that services inflation is still high. It is that it now looks like it could be getting worse just as growth cools. That is the kind of setup that pushes Wall Street to delay Fed-cut expectations and forces households to rethink any plan built around lower borrowing costs arriving soon. Reuters reported this week that Wells Fargo no longer expects any Fed cuts in 2026, while Citigroup pushed its expected start for cuts back to September from June.

Why this inflation signal is worse than it looks

The March ISM report did not just show higher prices. It also showed slower service-sector growth and softer employment, even while new orders rose to a two-year high. That suggests demand has not weakened enough to stop companies from passing along higher costs. In practice, businesses are still getting enough demand to keep pricing power, but not enough economic momentum to make the broader growth picture feel healthy. That is a bad combination for the Fed and for markets.

The pipeline is heating up too. Reuters reported on April 6 that the New York Fed’s Global Supply Chain Pressure Index rose to 0.68 in March from 0.54 in February, the highest reading since early 2023. On its own, that would not be a crisis. However, when supply-chain pressure rises at the same time as energy costs jump and services firms are already reporting steeper input prices, it becomes much easier for inflation to spread beyond gasoline and into everyday services.

Import costs are adding to that pressure. Reuters reported on March 25 that U.S. import prices rose 1.3% in February, the biggest monthly increase in nearly four years, while core import prices excluding fuel and food rose 3.0% from a year earlier. Service businesses buy equipment, supplies, replacement parts, fuel-intensive inputs, and imported goods all the time. So even if services inflation does not spike overnight, higher import costs make it harder for it to cool.

In other words, this is starting to look less like a one-off energy bump and more like a broader cost pass-through story. That is exactly the kind of inflation backdrop central bankers worry can linger longer than markets want.

Services were already sticky before growth started cooling

This is the part that makes the current moment more serious. March did not create the services inflation problem. It made an old problem look more dangerous.

The February CPI report already showed that “services less energy services” rose 2.9% year over year, while “services less rent of shelter” rose 3.3% year over year. Airline fares were up 7.1% from a year earlier, and medical care services were up 4.1%. Those are not numbers that scream inflation victory. They show the stickiest part of the consumer basket was already running too warm before the latest growth slowdown and energy shock fully fed through.

The Fed’s preferred inflation gauge has been telling the same story. Reuters reported on March 13 that January core PCE rose 0.4% month over month and 3.1% year over year, with services inflation increasing strongly because of healthcare and transportation services. Reuters also said economists expected February core PCE to show another 0.4% monthly rise after the producer-price data, which would mark a third straight monthly increase at roughly double the pace economists associate with a sustainable return to 2% inflation.

That is why Powell and Jefferson sound so cautious. Housing inflation has improved. Goods inflation may still cool further. But the service economy has not given policymakers the clear disinflation they expected. Now, as growth cools, businesses are reporting fresh cost pressure instead of relief.

Growth is cooling enough to hurt confidence, not enough to kill inflation

This is where the market story gets tricky. Slower growth does not automatically solve inflation. Sometimes it makes the setup more uncomfortable.

In the United States, service-sector activity is still in expansion, but it is cooling. Reuters said the ISM services index fell in March and service-sector employment weakened, even as the official March payrolls report remained firm. That disconnect matters. It suggests parts of the economy are losing momentum, but not in a clean, recessionary way that would quickly crush prices.

Outside the U.S., the pattern is getting clearer. Reuters reported on April 7 that the euro zone’s composite PMI fell to 50.7, its weakest pace in nine months, as surging energy costs and supply-chain disruption hit demand, especially in services. The U.K. services PMI dropped to 50.5 from 53.9, while firms reported the biggest monthly increase in input costs since 2021. Italy’s services PMI fell below 50 for the first time in 16 months, and France’s services sector remained in contraction. That does not prove the U.S. must follow Europe. Still, it shows the “cooler growth, hotter service costs” pattern is not just a local blip.

That is why the word stagflation keeps hovering in the background even if nobody wants to say it too loudly. The current picture is not 1970s-style collapse. It is something more modern and more frustrating: modest growth, stubborn services inflation, higher energy costs, and less room for central banks to help.

Why the Fed cares so much about services

The Fed can look through some temporary headline inflation. Services inflation is harder to dismiss because it is where persistence tends to live.

Jefferson said he expects inflation to move higher in the short term because of energy prices from the Middle East conflict, and he warned that trade-policy uncertainty and geopolitical tensions pose upside risk to his inflation forecast. Powell, meanwhile, said the Fed is balancing downside risk to the labor market against upside risk to inflation, and that in such an environment not cutting can be the more prudent path.

New York Fed President John Williams added another important piece on April 7. Reuters reported that Williams expects the Middle East war to drive up inflation this year and said headline inflation could rise to about 2.75% by midyear, even though he believes policy is still appropriately positioned. That does not sound like a central bank eager to rush toward rate cuts just because growth is losing a little speed.

Markets have already started adjusting. Reuters reported on April 3 that investors were watching the upcoming CPI report for signs that higher energy prices were feeding into broader inflation, with economists expecting a 0.9% monthly rise in March CPI and a 0.3% rise in core CPI. The Bureau of Labor Statistics says the March CPI report is scheduled for April 10 at 8:30 a.m. Eastern. That report matters because it will show whether the uglier service-cost story is starting to broaden into the official inflation data.

What ordinary investors and households should take from this

First, stop treating services inflation like a technical detail. It is the part of inflation that hits real life most directly. Insurance, healthcare, travel, repairs, education, rent-linked costs, and other core services shape household budgets far more persistently than one weird move in used cars. The February CPI breakdown makes that plain.

Second, do not assume slower growth will automatically bring quick Fed relief. Right now, the economy looks cool enough to dent confidence, but not weak enough to erase pricing power. That is the worst middle ground for anyone waiting on lower rates to fix a mortgage decision, a refinancing plan, or a stretched stock-market valuation. Reuters’ reporting on delayed Fed-cut expectations reflects exactly that tension.

Third, watch the next few inflation releases carefully, especially services-heavy categories and any evidence of broader pass-through from energy and supply chains. The market does not need an inflation disaster to stay nervous. It only needs enough evidence that the hardest part of inflation is no longer improving. Right now, that is exactly what the latest data are hinting at.

The bottom line

Services inflation is getting worse as growth cools because the economy is now producing the least comfortable mix for policymakers: softer activity, firmer input costs, and little real progress in the stickiest inflation categories. The March ISM report, the New York Fed supply-chain data, recent CPI and PCE readings, and repeated Fed comments all point in the same direction. Growth may be losing momentum, but inflation pressure in services is not fading the way the Fed hoped.

For regular readers, the practical message is simple. Do not build your money decisions around the idea that cooling growth automatically means easier prices or fast rate cuts. In 2026, the harder inflation problem is still living in services, and right now it looks more stubborn, not less.

HypeBucks
XP of the Day: A 0.4% monthly core inflation pace is roughly double the speed policymakers want if inflation is supposed to glide back toward 2%.
Next Move: Spend 10 minutes reviewing your top five recurring service costs and flag which ones rose in the last three months.