Services Costs Are Rising Into Slower Growth

The September services data delivered an uncomfortable planning signal: activity is still expanding, but the pace softened while cost pressure intensified.

The Institute for Supply Management reported a Services PMI of 54.9%, down from 55.4% in August. At the same time, its Prices Index rose to 74.0%, the highest reading since July 2022. The result is not a recession signal. It is a warning that finance teams may face slower volume growth and higher input costs at the same time.

The judgment

• Implication: A forecast that assumes stable demand and easing costs is now exposed on both sides. The September survey supports keeping a positive growth case, but it weakens the case for automatic margin recovery.
• What would change the conclusion: The concern would ease if the price index falls over the next several releases, supplier lead times normalize and companies stop reporting broad cost increases without a corresponding decline in activity.
• Management action: Reforecast revenue volume, pricing, labor and purchased inputs separately. Then identify which cost changes can be absorbed, passed through, renegotiated or deferred—and how quickly each response would reach cash.

One headline number hides two operating signals

A PMI above 50 indicates expansion, so 54.9% still describes a growing services economy. But the half-point decline from August matters less than the divergence underneath it.

ISM’s Prices Index rose 1.4 percentage points to 74.0%. Seventeen of the 18 services industries reported higher prices paid. Respondents also cited supply constraints, fuel and commodity costs, and purchases made ahead of expected price increases.

That does not mean service-sector costs are rising at a 74% rate. The index is a diffusion measure: it indicates how broadly purchasing managers report increases, not the size of the price change. Finance teams should use it as a directional warning, not insert it into a budget as an inflation assumption.

The forecast can be wrong in both directions

Many budgets handle inflation as a single line: increase expenses by a percentage and assume revenue grows broadly in step. That shortcut becomes dangerous when demand and costs move differently.

If activity cools, unit volume or billable work may miss plan. If input costs continue rising, gross margin can compress even when nominal revenue grows. The combination creates a forecasting problem that a single revenue-growth percentage or across-the-board expense factor will not reveal.

This is the same model-risk issue raised by the recent change in cost-of-capital assumptions: an operating plan can look precise while depending on an economic relationship that has changed.

Build a price-volume-cost bridge

The practical response is not to declare stagflation from one monthly survey. It is to make the operating model more explicit.

1. Separate price from volume. Show how much revenue growth depends on customer count, utilization, units, admissions, billable hours or another operating driver—and how much depends on price.
2. Separate labor from purchased inputs. Wage pressure, contractors, freight, utilities, insurance, technology and supplies move for different reasons and on different timelines.
3. Measure pricing lag. A business may eventually pass through higher costs, but margin and cash can weaken during the delay. Contracts, grant restrictions, membership pricing and customer sensitivity can make that lag longer.
4. Identify response capacity. Document which costs are committed, which can be renegotiated and which can be reduced without damaging delivery capacity.
5. Connect the income statement to cash. Higher inventory, earlier purchasing or slower collections can create liquidity pressure before the full margin effect appears.

The site’s analysis of the cash-access divide makes the same distinction: an organization can remain operationally confident while having less room to absorb a timing or financing shock.

Use scenarios, not a false point estimate

The September survey should not cause finance teams to replace one confident forecast with another. A better approach is to preserve at least three cases:

• a base case in which service activity continues expanding and cost pressure gradually eases;
• a margin-pressure case in which activity slows modestly while purchased inputs remain elevated; and
• a downside case in which weaker demand limits pricing power just as cost commitments remain sticky.

Each case should have a management response and an observable trigger. The free Forecast Scenario Planner can help keep those assumptions and actions visible rather than burying them in one blended budget.

The decision is about resilience, not prediction

One survey does not determine the economy’s path, and monthly diffusion indexes can reverse. The September reading is still useful because it shows why margin planning cannot depend on costs easing automatically as growth cools.

The finance question is not whether 54.9% or 74.0% becomes the new normal. It is whether the organization can absorb slower activity, manage broader cost increases and act before a margin problem becomes a cash problem.

Sources

• Institute for Supply Management — September 2026 Services PMI report, October 5, 2026.
• Reuters — U.S. services-sector activity slows in September as price pressures mount, October 5, 2026.

By Robert Young | Numbers & Judgment. Published October 5, 2026.