Service Sector Inflation Could Test Consumers’ Appetite to Spend in 2024

Through the last several months, payment networks, banks and buy now, pay later (BNPL) firms have pointed to the resilience of the U.S. consumer.

Consumers have increasingly opened the proverbial purse strings at restaurants, venues and hotels while traveling. Services, then, are in demand, as we get out and about, at least generally speaking. A slowdown might have been expected, given the fact that the holiday season would mean we would have pivoted a bit to fill our baskets with (tangible) gifts for friends and families.

To that end, the slew of economic data Friday (Jan. 5) showed a bit of bumpiness in the services sector, with some volatility depending on the metric you’re examining. Service firms are still growing, but the latest reading for December showed some stickiness in input prices (read inflation).

As detailed by the Institute for Supply Management, economic activity in the services sector expanded for the 12th consecutive month, with a December reading of 50.6%. Readings above 50% indicate growth.

That’s a bit of a slowdown from the 52.7% reading in November. However, the Business Activity Index was up in December to 56.6%, accelerating from November by 1.5%. Prices paid for inputs came in at 57.4%, down month over month from 58.3% in November, but evidence that companies are still paying more for the essentials of keeping the doors open and the registers ringing.

Staffing Growth

The jobs report that came separately Friday showed that leisure and hospitality staffing grew by 40,000 positions and the retail sector grew by 17,000, indicating that companies in these sectors anticipate continued demand and growth over the near and long term. The Bureau of Labor Statistics reported that last month, average hourly earnings for all employees on private nonfarm payrolls gained 0.4% — and through the past year, average hourly earnings were up by 4.1%.

We’ll know more as to whether wage growth paced inflation when Consumer Price Index data is released next week.

But if service firms are finding the cost of doing business remains stubbornly high and are still on track to raise prices (albeit at a slowing pace), then consumers may feel some pinch to their spending power, especially on experiences.

Recent reports, such as Mastercard’s SpendingPulse survey, showed that spending at restaurants grew by nearly 8% through the holiday season. Tipping adds to the bill and lightens the wallet. PYMNTS Intelligence found that “tipflation” is commonplace, and suggested tips (on the part of the merchants) are higher than they used to be.

Four in 10 individuals planned to dip into savings to cover holiday spending, separate PYMNTS Intelligence found. Now that January is here, and the holidays are over, consumers (especially those in the paycheck-to-paycheck economy) are due to take stock of their finances and where they can (and cannot) spend money.

Whether that means they’ll continue to dine out, visit the theater, and stay in hotels remains to be seen. For the service economy, whether the holiday (slight) slowdown will have legs remains to be seen too.

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