US service-sector businesses experienced steady expansion in Q3, leading to faster price increases and jeopardizing the central bank's disinflation plan. This is expected to result in higher interest rates for a longer period, dampening interest-sensitive expenditure and potentially slowing growth in oil consumption in 2024. The impact of persistent US services inflation on the oil outlook and the economy is a cause for concern. Persistent price rises by U.S. service sector businesses have underscored the stickiness of inflation and pushed back expectations for interest rate reductions in 2024, jeopardizing hopes for a successful soft landing. Traders now expect overnight interest rates to decline by 75 basis points before the end of the year, with the first cut not until May or probably June, after prices rose faster than expected in data published on February 13. Persistent price rises should not have come as a surprise given evidence many businesses especially in the services sector still believe they have some scope to raise prices without harming revenues or profits. U.S. consumer prices increased by 3.1% over the twelve months ending in January 2024, down from an increase of 9.0% at their peak over the twelve months ending in June 2022. But there has been no significant or sustained slowdown in the all-items rate since mid-2023 indicating pricing power has stabilized since the worst of the business cycle slowdown in the second and third quarters of 2023. Prices for merchandise and other commodities have been falling, but prices in the much-larger and more labor-intensive service sector have actually been rising faster. [fe083e0d][f41e77b5][eff1b149]
Inflation data is closely watched as markets await looser U.S. monetary policy. Services inflation is running hot while goods inflation continues to cool. National Bank Financial Inc. (NBF) noted that annual services inflation has been running at over 5% for 24 consecutive months, the longest streak since the early 1990s. Rising U.S. tariffs on Chinese goods could disrupt the decline of goods inflation. The trend of lower inflation may be tougher to sustain in the months ahead. [70f3b301]