US business activity unexpectedly climbed this month to nearly a one-year high, bolstered by stronger services and manufacturing that threatens to reignite inflationary pressures.

The S&P Global flash April composite purchasing managers index rose 1.2 points to 53.5 - the highest since May - the group reported Friday. Readings above 50 indicate expansion, and the gauge has now exceeded that threshold for three months after contracting through the back half of last year.

Firms saw new orders jump to the highest rate in 11 months, especially in the service sector. That allowed businesses to pass on higher costs to customers, resulting in the fastest jump in output prices in seven months.

“The upturn in demand has also been accompanied by a rekindling of price pressures,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. “This increase helps explain why core inflation has proven stubbornly elevated at 5.6% and points to a possible upturn - or at least some stickiness - in consumer price inflation.”

An uptick in inflation would reverse months of progress, even though price growth is still too fast. The Federal Reserve is expected to raise interest rates again next month, but officials are unsure as to how much further they’ll need to go.

S&P Global’s measure of business activity at service providers rose to the highest in a year, while manufacturing activity expanded for the first time since October. Firms in both sectors boosted employment by the most since July, but still reported growing backlogs amid struggles to attract and retain skilled workers.

Businesses remained upbeat about the outlook this month, with the degree of confidence in the year ahead improving to the second highest since May. Even so, optimism remains below average due to higher interest rates and inflationary pressures.

U.S. inflation is now expected to come down faster than originally projected thanks to tighter credit conditions in the aftermath of several bank failures.
Economists lowered their projections for the consumer price index as well as the personal consumption expenditures price index for every quarter through the first half of 2024, according to the latest Bloomberg monthly survey of economists. The poll was conducted April 14-19.

With several lenders including Silicon Valley Bank collapsing last month, consumers and businesses say it’s much harder to get a loan. That’s having a similar effect as the Federal Reserve raising interest rates, potentially leaving less work for policymakers to do to ultimately bring inflation down.

Even so, PCE — the Fed’s preferred inflation gauge — is now expected to end the year at 3.8% on an annual basis, almost double the central bank’s target. Price pressures have been easing in recent months, but not as fast as officials would like.

“Banking stresses mean much tighter lending conditions, which in an environment of rising borrowing costs, soft business sentiment and a rapidly weakening housing market, makes a hard landing for the economy look all the more likely,” said James Knightley, chief international economist at ING. 

“Inflation will slow even more quickly in this environment, opening the door to interest-rate cuts later this year,” he said.

Economists kept the odds of a recession in the next 12 months at 65%, the highest level since the middle of 2020.

They revised expectations for first-quarter gross domestic product up to 1.8% from 1.3% on stronger consumer spending. The government will release its first estimate of that figure next week.

This article was provided by Bloomberg News.