Businesses across the U.S. are reporting the sharpest increase in service-sector expenses since 2022, raising concerns that inflation could begin creeping back into household budgets. Higher costs are spreading across the services economy, increasing the likelihood that consumers will pay more for restaurant meals, hotel stays, home repairs and other everyday purchases in the months ahead.
New data from the Institute for Supply Management showed the U.S. services sector expanded faster than expected in May, even as companies reported a renewed jump in operating expenses. The combination of solid demand and rising business costs suggests inflation remains a challenge for both employers and consumers despite hopes that price pressures were easing.
Companies are also building inventory and reporting supply constraints as they try to protect themselves from future shortages and higher prices, adding another layer of strain to an economy that has only recently started to see inflation cool.
The stronger growth figures came alongside mounting evidence that operating expenses are climbing again. The ISM's measure of prices paid by service-sector firms reached its highest level since August 2022, while companies across multiple industries reported higher fuel-related bills and growing difficulty sourcing key materials and equipment.
Much of that strain is linked to disruption in global commodity markets following the conflict in the Middle East. Higher energy prices, supply bottlenecks and shortages of industrial inputs are starting to move through business supply chains. Educational institutions reported higher costs for computers and construction materials, while accommodation and food-service operators said suppliers were increasingly adding fuel surcharges and passing through other increases.
For employers, the challenge is becoming harder to ignore. Companies can absorb higher expenses for a period, but eventually many are forced to raise prices, delay investment plans or become more cautious about hiring. That creates a broader squeeze as rising operating bills move beyond company balance sheets and into household finances.
Another sign of caution emerged in inventory data. Service-sector inventories surged to their highest level since 2010 as firms rushed to secure supplies before prices potentially rise further or shortages worsen. The move suggests many employers would rather hold extra stock than risk being caught short if supply conditions deteriorate later in the year.
At the same time, some signs of economic momentum are becoming less convincing. Growth in backlog orders slowed and exports weakened, while service-sector employers reported hiring freezes and decisions not to replace departing staff. Job creation remains positive overall, but many companies appear reluctant to commit to major workforce expansion while expenses continue climbing and future demand remains uncertain.
Most people do not notice inflation returning in a single dramatic jump. It usually arrives in smaller ways — a more expensive takeaway, a higher repair bill, a hotel stay that suddenly costs more than expected. Many households have only recently started to feel some relief from the inflation shock of recent years, making businesses particularly sensitive to how much of these additional expenses they can pass on.
Financial markets are paying attention too. Investors have spent much of the past year expecting inflation to ease steadily. A renewed increase in business expenses complicates that outlook and could make it harder for policymakers to move toward lower interest rates if price growth remains stubbornly elevated.
The headline numbers still look healthy. Underneath them, though, companies are stockpiling supplies, holding back on hiring and paying more to keep operations running. Demand remains intact, but the economy is becoming more expensive to navigate. If these trends persist, the next warning signs may show up less in government reports and more around kitchen tables, as households think harder about what they can afford to spend, borrow or save.
