(Reuters) -U.S. services sector activity unexpectedly flatlined in July with little change in orders and a further weakening in employment even as input costs climbed by the most in nearly three years, underscoring the ongoing drag of uncertainty over the Trump administration's tariff policy on businesses.

The Institute for Supply Management (ISM) said on Tuesday its nonmanufacturing purchasing managers index (PMI) slipped to 50.1 last month from 50.8 in June. Economists polled by Reuters had forecast the services PMI would rise to 51.5. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy.

Economists say businesses continue to struggle to digest the aggressive tariffs President Donald Trump is imposing on goods imported from abroad. Last week Trump, ahead of a self-imposed deadline of August 1, issued a barrage of notices informing scores of trading partners of higher import taxes set to be imposed on their exports to the U.S.

With tariff rates ranging from 10% to 41% on imports to the U.S. set to kick in on August 7, the Budget Lab at Yale now estimates the average overall U.S. tariff rate has shot up to 18.3%, the highest since 1934, from between 2% and 3% before Trump returned to the White House in January.

The ISM survey's new orders measure declined to 50.3 last month from 51.3 in June, with export orders falling back into contraction for the fourth time in five months.

The survey's measure of services employment fell to 46.4, the lowest level since March, from 47.2 in June. It has contracted in four of the last five months, and the reading followed the release last week of the Labor Department's surprisingly soft U.S. employment report. Not only was job creation softer than expected in July, previously reported job growth for May and June was revised lower by 258,000 positions, marking the biggest net downward revision on record outside of the COVID-19 pandemic. The outsized revision led Trump to fire the Bureau of Labor Statistics commissioner on Friday.

Price pressures, meanwhile, continue to mount. The survey's prices paid index rose to 69.9, the highest level since October 2022, from 67.5 in June.

Inflation until now has largely remained moderate because businesses have been selling merchandise accumulated before import duties came into effect, but data last week showed prices in some categories of goods like home furnishings and recreational gear have begun rising briskly. More benign inflation from the services sector has helped keep overall inflation in check, but the ISM data brings into question whether that trend will continue or further fan concerns about the emergence of stagflation.

The Federal Reserve last week left its benchmark interest rate unchanged in the 4.25%-4.50% range as the majority of policymakers then saw inflation as the greater risk to guard against.

Two Fed governors - Christopher Waller and Michelle Bowman - dissented, saying they believed the job market was facing the greater risk - a position seemingly validated by Friday's weak employment data. They believe competition and softening demand will blunt some of the anticipated price hikes from tariffs and argue the Fed should be lowering rates now to reduce the restraint they are imposing on activity.