Services sector shakes off higher interest rates

The services sector has reported an uptick in input costs, including labour, shipping, and fuel.

The services sector has reported an uptick in input costs, including labour, shipping, and fuel. Photo: AAP

Australian businesses remain in pretty good shape but still-high costs for shipping, fuel, and labour suggest inflation is lingering.

Fresh signs of price pressures follows the Reserve Bank of Australia’s Tuesday decision to keep interest rates on hold in October while staying alert to the risk of persistently high inflation.

Activity in the services sector picked up strongly in the final month of the third quarter, according to the Judo Bank Australia services purchasing manager index report.

The services business activity index recorded its steepest growth since May, lifting to 51.8 in September, up from 47.8 in August.

A reading above 50 indicates that the services sector is expanding, while a reading below 50 points to a contraction.

Judo Bank economist Matthew De Pasquale said the indicator could swing around month to month, but the jump in services sector activity suggested a level of resilience to higher interest rates.

This was reflected in a sharp uptick in new orders from customers, with the indicator hitting its highest level since mid-2022.

The services sector also recorded a slight uptick in input costs, with higher labour, shipping and fuel prices all contributors.

Input costs have been hanging around above pre-pandemic levels and haven’t budged much for the past six months.

“With consumer demand proving more resilient in the services sector, elevated input cost pressures will likely keep upward pressure on final prices for the remainder of 2023,” Mr De Pasquale said.

The economist said the sticky inflation and resilient services sector activity, as highlighted by the index and official economic data, “pose the question of whether the economy is slowing down enough to achieve the soft-landing forecast by the RBA”.

A separate index measuring activity in manufacturing, construction, engineering, technology and business services sectors also improved in September.

The Ai Group Australian industry index was still recording contractionary conditions but did gain 8.2 points to negative 3.5 points.

The index, which covers roughly a third of the Australian economy, recorded weakening but still elevated input prices.

Stronger prices at the pump have emerged as the latest complication to the RBA’s fight against inflation, helping to bump August’s monthly consumer price index higher.

Yet the latest data flows are yet to throw off the RBA’s plan to bring inflation back to target by late 2025, with the board comfortable monitoring the situation on the sidelines for now.

Inflation data in the quarterly report, due out later in the month, will offer a more comprehensive picture of the inflation state of play.


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