The US services sector grew faster in May, but prices grew faster too and jobs went the other way.
That's the report investors got Wednesday from the Institute for Supply Management.
The headline says expansion, but the fine print says something closer to stagflation - when prices rise while the economy slows.
That mix puts the Fed in a tough spot, since cutting rates to support hiring would risk pouring fuel on already-climbing prices.
ISM's services index climbed to 54.5 last month - a three-month high, with any reading above 50 signaling growth.
Behind the headline, almost every service industry the ISM tracks expanded - wholesale trade, entertainment, and construction all moved up.
Only real estate and leasing shrank, while new orders and business activity both climbed - a sign demand is holding up better than expected.
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Then there's the prices line: ISM's prices-paid gauge - which tracks what businesses pay for materials - jumped to 71.3.
That's the highest reading since August 2022, when inflation was still front-page news, and companies are blaming two things: tariffs and the Iran war.
Why? The war has pushed energy bills up, raised shipping costs, and tangled supply chains worldwide, prompting one food-services firm to tell ISM it expects "significant cost increases" by late Q2 and "definitely in Q3."
Most of those costs eventually land on customers, who are already paying more at the pump and the grocery store.
The inventory gauge also surged - tying its all-time record - as businesses stockpile materials ahead of what they expect will get worse.
Think of it as the corporate version of buying extra canned food before a storm.
ISM's employment gauge fell for a third straight month, with the committee chair saying hiring freezes and unfilled positions came up "frequently" in the survey.
Services employs most US workers, so when service companies stop hiring while their costs keep climbing, the squeeze hits both sides at once - businesses paying more, workers earning less.
Friday brings the next read on that squeeze: the May payrolls report is expected to show around 80,000 jobs added, following 115,000 in April, and a weaker number would tighten pressure on the Fed even further.
Rising prices, shrinking payrolls, and record stockpiling don't usually show up together in a healthy economy, and Bloomberg's own economist called the report a setup for "a swift retreat in June."
Markets will also watch for any signal from Fed officials this week on whether the latest data shifts their thinking on rate cuts.
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