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Prices surge as UK service sector sees costs spike

The UK service sector continued to expand in September, a closely-watched survey showed on Tuesday, but rising costs meant prices surged.
The latest IHS Markit CIPS UK Services PMI business activity index came in at 55.4 in September. That was up slightly on August’s six-month low of 55.0 and above both consensus and the flash reading of 54.6.

However, the survey also found that “rapid rises” in fuel, energy and staff costs had been passed onto consumers during the month. As a result, the inflationary rate of prices charged accelerated at the fastest pace since the survey began in 1996.

New order growth weakened for the fourth month in a row, while the increase in new business volumes was the slowest since order books returned to expansion in March. Staff shortages, supply issues and the end of the stamp duty holiday were some of the most common reasons cited for the softer demand by respondents.

The composite output index edged marginally higher to 54.9 from 54.8. That was similarly above consensus and the flash estimate, of 54.1. However, the index eased to 56.3 in the third quarter from 61.9 in the second, weighed down primarily by slower manufacturing production growth.

Tim Moore, economics director at IHS Markit, said: “The supply chain crisis put a considerable brake on the recovery in the UK service sector. Survey respondents widely noted that shortages of staff, raw materials and transport had resulted in lost business opportunities. Consequently, new orders expanded at the slowest pace since the end of the winter lockdown.

“Another spike in operating expenses was reported, even though this data is yet to fully reflect the inflationary impact of the UK fuel crisis and surging energy prices.”

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said: “The chokehold on supply chain deliveries made food, fuel and logistics much more expensive, which was a factor in dampening business optimism for activity in the next 12 months.

“As prices charged rose at their fastest rate since 1996, it seems the floodgates are open for higher inflation to wash through the UK economy and firms fear the growth this month may be eroded further by higher costs and shortages as we move towards the festive period.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “The services PMI was only a touch higher in September than in August, despite the fairly large upward revision, suggesting that the recovery has failed to gather much momentum following the slowdown in July.

“Meanwhile, the jump in the services output price index – one of the few survey indicators of domestically-generated inflation – to a record high of 61.5 from 57.1 in August suggests that supply constraints increasingly are pushing up prices. We also expect some businesses in the hospitality and tourism sector to hike prices in October, when the rate of VAT for the sector will jump to 12.5% from 5%, and then again in April, when the rate will return to 20%.

“Nonetheless we continue to expect wage growth to slow in the coming months, as unemployment and underemployment both rise following the withdrawal of the furlough scheme.”

The survey was carried out between 13 and 28 September. The questionnaire was sent to a panel of around 650 service sector companies.

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