NEW YORK (AP) – The economy received another inflation warning on Wednesday, when a survey of industry executives showed that energy costs drove prices higher in September while business activity slowed in the services sector. The report reinforced expectations that the Federal Reserve would continue to raise rates as the economy struggles with rising fuel costs aggravated by Hurricane Katrina.

The Institute of Supply Management, which conducted the survey, said its non-manufacturing business activity index was at 53.3 percent in September, down from August’s reading of 65 percent. The group’s index of prices paid rose 14.3 points to 81.4 percent, the highest level and the biggest jump for the index in the eight-year history of the report.

The survey, whose results chipped away at broader Wall Street stock indexes on Wednesday, found that many business executives are concerned about the continuing rise in oil and gas prices after Hurricane Katrina and about the toll rising energy costs will take on the economy.

“That is the $64,000 question: if and when manufacturers and businesses decide they have to pass through these rising prices to consumers?” said Jerry Zukowski, deputy chief economist at Nomura Securities International Inc. “A lot of it is energy. We are clearly not out of the woods in terms of these price pressures.”

While the survey uncovered worries about energy prices, economists cautioned that some of its findings may have been exaggerated by the major storm.

“These numbers were highly impacted if not distorted by Hurricane Katrina,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors.

“Many members’ comments expressed concern about the continuing rise in oil and gas prices,” Ralph Kauffman, chair of the ISM’s non-manufacturing business survey committee, said in a statement.

Zukowski added that it may be another four or five months before the higher prices are passed on to consumers. “This gives you an idea of why the Fed raised rates in September,” he said, referring to the central bank’s eleventh consecutive rate increase announced last month.

Dallas Federal Reserve Bank President Robert Fisher warned Tuesday inflation was nearing the high end of the Fed’s comfort zone – a clear signal that the Fed’s short term interest rate hikes would continue.

Hurricane Katrina not only ravaged numerous facilities involved in the production and delivery of oil, it also promises to create supply shortages because of goods being delivered to the stricken region.

Respondents to ISM’s September survey in the utilities industry said they were “concerned with possible shortages in utility products in the near future; for example wood poles, electric wire, transformers … as they may be diverted to the states affected by the hurricane.”

Executives within business services, meanwhile, expressed “obvious concerns about the availability and prices of raw materials affected by Hurricane Katrina.”

Hurricane Katrina also slowed deliveries on roads and railroads and this helped to drive higher ISM’s supplier deliveries index component, a gauge measuring the performance of suppliers to non-manufacturing businesses.

The ISM survey found that commodities hit by price increases included aircraft fuel, beef, building materials, copper, and diesel fuel.

The ISM’s new export orders index fell 8.5 points to 55 percent, while its employment index dropped 4.7 points to 54.9 percent.

According to the ISM, industries experiencing growth included construction, communication, mining, insurance, retail trade and utilities.

Industries showing a drop in activity last month included real estate, entertainment, agriculture, business services and finance and banking, the ISM said.

Wednesday’s report on the services sector of the U.S. economy follows a survey of manufacturers published on Monday by the ISM. That survey also recorded a dramatic rise in its prices paid component.

“It is troubling to see so many more purchasing managers, manufacturing and non-manufacturing, paying higher prices to their vendors,” said Johnson. “It suggests that the Federal Reserve is faced with an economy which is weaker and inflation which is stronger. That is not a particularly good configuration.”