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UK services sector grows as inflationary pressures mount

A buoyant services sector helped bolster the UK economy last month, a widely-respected survey showed on Wednesday, but inflationary pressures continued to mount.
The IHS Markit Services PMI Business Activity index, published ahead of November’s Bank of England rate-setting meeting on Thursday, came in at 59.1 in October, a three-month high and up on September’s 55.4.

It was also above consensus and the flash estimate, both for 58.0.

The composite purchasing managers’ index, a weighted average of comparable manufacturing and services PMI, was 57.8, up on September’s 54.9 and the highest reading for three months. It was also above the consensus and flash estimate, for 56.8, although remains well below May’s peak of 62.9.

Service providers reported the strongest increase in new work since June, as the economy reopened and international travel restrictions were loosened.

However, stronger demand, staff shortages and under-pressure supply chains caused inflationary pressures to spike, with operating expenses and prices charged by service providers rising at the steepest rates since the survey began in 1996.

As a result, the degree of positive sentiment about the year ahead eased, and is now at its lowest point since January.

Tim Moore, economics director at IHS Markit, said: “Some 59% of the survey panel reported an increase in their average costs during October, compared with only 15% at the same time in 2020.

“Record rates of input price and output charge inflation appear to have dampened business optimism. Comments from survey respondents also cited worries about prolonged staff shortages and constraints on growth due to the supply chain crisis.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “The dominant service sector in the UK economy had a surprisingly good month, with a strong uptick in overall output, job creation and new orders as business and consumers began to spend again unfettered by lockdown and pandemic restrictions.”

But he conceded: “Escalating business costs remain deeply concerning, as salaries rocketed along with fuel and energy costs and material shortages as a result of supply chain disorder.

“The seemingly likely rise in interest rates this week may take some of the heat out of the overinflating UK economy, but will also result in additional pressure on some household budgets, threatening to cut off this stream of good fortune early next year.”

Interest rates are currently at a record low of 0.1%, and the Monetary Policy Committee needs to balance rising inflationary pressures without restricting economic growth.

Jay Mawji, managing director at IX Prime, said: “While the uptick in new orders and services sector activity is welcome, this latest snapshot of an industry that accounts for four-fifths of the UK economy reveals an alarming inflationary flipside. Service industries, which together account for 82% of UK jobs, are now seeing their costs spike faster than at any time in the past quarter of a century.

“While [Andrew Bailey] has dropped heavy hints that he’s ready to act, expectations of a rate rise at [Thursday’s] meeting have been moderated. But [this] spike in service sector inflation shows plenty more consumer inflation is coming down the track.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “The services PMI provides the first indication of how the labour market has fared since the withdrawal of the furlough scheme.

“The employment index rose to 58.6, suggesting that unemployment has risen at all. Nonetheless, the majority of those still on furlough were employed at small business, which probably are underrepresented in the Markit survey. In addition, some businesses probably are reporting rising employment when in fact they are simply asking furloughed staff to come back.

“We expect the MPC to wait until February to hike the rate to 0.25%, and then expect only one further rate hike in 2022, far less than markets currently anticipate.”

Martin Beck, senior economic advisor at the EY Item Club, said: “Further inflationary pressures will no doubt be noted by those MPC members considering voting for a rise in November’s meeting. But those pressures still look predominantly to be the result of the adjustment pains of an economy emerging from hibernation, which should give pause for thought.

“While the decision looks to be on a knife-edge, the EY Item Club thinks a majority on the committee will stick with a ‘wait and see’ approach, with rise deferred until February.”

Data for the IHS Markit CIPS PMI survey was collected between 12 and 27 October, with questionnaires sent to a panel of around 650 sector sector companies.

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