Service-sector businesses across the United States grew faster in May 2026, but the cost of doing business surged to a level not seen in nearly four years. The Institute for Supply Management reported a Services PMI of 54.5% for May, up from 53.6% in April, while the Prices Paid index jumped to 71.3%, the highest reading since August 2022. Diesel, gasoline, and oil-related commodities were among the most frequently cited cost drivers, and respondents pointed to tariffs as an added source of pressure on input prices.
A widening gap between growth and rising costs
The headline number looks healthy on its own. A reading above 50% signals expansion, and the 0.9-percentage-point climb from April’s 53.6% to May’s 54.5% reading shows demand for services is still building. But that gain is being outrun by costs. The Prices index rose 0.6 points from April’s 70.7% to 71.3%, pushing deeper into territory that signals broad-based price increases across the sector.
The last time the Prices index reached this level was August 2022, when the overall services PMI stood at 56.9% and the Federal Reserve was in the middle of its most aggressive rate-hiking cycle in decades. Back then, the economy was running hotter and absorbing price increases more easily. The current environment is different: growth is moderate, not surging, which means service firms have less room to pass costs along to customers without risking lost business.
Recent history underscores how much the backdrop has changed. In April, the services PMI stood at 53.6%, according to the prior ISM services report, already indicating expansion but with cost pressures that were slightly less intense than in May. The acceleration in prices while growth only edges higher suggests that inflation in the service sector is becoming more entrenched, rather than simply reflecting a short-lived spike in demand.
For anyone running or working in a service business, the practical question is straightforward. When input costs rise faster than revenue growth, margins shrink. Companies face a choice between absorbing the hit, cutting staff, or raising prices for customers. The ISM data suggest that choice is becoming more urgent with each passing month.
Energy prices and tariffs drive the May squeeze
The ISM report singled out diesel, gasoline, and oil-related commodities as items frequently cited as rising in price during May. That tracks with spring trends in federal petroleum statistics, which show the week-to-week movements in retail gasoline and on-highway diesel prices. Service businesses that depend on transportation, delivery, or fleet operations feel fuel costs directly. Those that do not still absorb them indirectly through higher shipping and logistics charges from suppliers.
Tariffs added a second layer of cost pressure. While the ISM report did not break out specific tariff amounts or identify which service sub-sectors were hit hardest, the mention itself is significant. Tariff-driven cost increases tend to be sticky because they are policy-driven rather than market-driven, meaning they do not ease when demand softens. For service firms already dealing with elevated energy bills, tariffs compound the problem by raising the price of imported goods and materials used in daily operations.
The combination creates a two-front cost squeeze that is harder to manage than either factor alone. Energy prices can swing with global supply conditions, and tariff schedules can shift with trade negotiations, but in the near term both are pushing in the same direction: up. That raises the odds that businesses will eventually test customers’ willingness to pay more, especially in segments where demand has remained relatively resilient.
What the employment sub-index will reveal next
One of the most closely watched pieces of the ISM services report is the employment sub-index, which tracks whether service firms are adding or cutting staff. When demand is firm and costs are manageable, companies are more likely to expand headcount. When cost pressures intensify and revenue growth slows, hiring plans are often the first lever to adjust.
The May services PMI, at 54.5%, points to ongoing expansion in activity, but the surge in the Prices index complicates the outlook for jobs. If businesses cannot fully pass higher fuel, tariff, and materials costs on to customers, they may look to protect margins by slowing hiring, reducing hours, or trimming positions in back-office and support roles. That could show up in coming months as a softer or more volatile employment reading, even if the overall PMI remains above 50%.
At the same time, certain service industries that are especially sensitive to transportation and imported inputs-such as logistics, wholesale trade, and some professional services-may feel the squeeze earlier and more acutely than others. Their responses to the cost shock will help determine whether the broader services labor market cools or simply grows at a more measured pace.
For policymakers and investors, the interaction between the employment sub-index and the elevated Prices reading will be a key signal. Persistent cost inflation alongside steady or weakening hiring would suggest that the service sector is running into a profitability wall, rather than overheating. For workers and business owners, the message is similar: growth is still there, but it is getting more expensive to sustain, and the next round of decisions about staffing and pricing may be tougher than the last.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
