Inflation tightens grip on UK services firms in worry for BoE

Companies in Britain's services sector increased prices at a rapid pace in May as they saw another month of strong demand, according to a survey that could add to the Bank of England's worries about the persistence of high inflation.

Measures of inflation for services firms' costs and their prices edged higher, although they are down on peaks seen shortly after Russia invaded Ukraine last year, the preliminary reading of the S&P Global/CIPS UK Purchasing Mangers' Index (PMI) showed.

 

The BoE is watching prices in the services sector as an indicator of how much inflation pressure remains in the economy. It has increased interest rates at 12 meetings in a row since late 2021 and is due to announce its next decision on June 22.

Tuesday's PMI survey once again painted a contrasting picture for British businesses with services firms reporting growth in May - albeit slowing slightly from April's one-year high - while manufacturing companies' business shrank again.

S&P Global's Composite PMI - spanning both the services and manufacturing sectors - dropped to 53.9 from the one-year high of 54.9 recorded in April. But it remained in growth territory above the 50.0 level for the fourth month in a row.

 

Chris Williamson, chief business economist at S&P Global, said the PMI was consistent with quarterly gross domestic product growth of 0.4 percent in the second quarter, speeding up from 0.1 percent in the first three months of the year.

"However, this growth spurt is driving renewed inflationary pressures, as service providers struggle to meet demand and hence not only offer higher wages to attract staff but also find themselves able to charge more for their services," he said.

"These survey results are nothing but hawkish in suggesting the Bank of England has more work to do to quash stubbornly high inflationary pressures in the services economy."

So far in 2023, Britain's economy has fared better than many forecasts of a recession made late last year.

There have also been signs that the country's main measure of inflation - which is higher than in many other countries - is set to slow in the coming months, a relief for Prime Minister Rishi Sunak who has promised to halve it this year.

 

The consumer price index is likely to have fallen to 8.2 percent in April from 10.1 percent in March, according to the consensus among analysts polled by Reuters ahead of Wednesday's official data release.

But underlying core inflation - which excludes volatile energy and food prices - is expected to fall more slowly, raising the prospect of the BoE having to keep borrowing costs high for longer than expected until recently.

By contrast to the rise in inflation among services firms seen in Tuesday's PMI survey, prices paid by manufacturers fell for the first time since November 2019 while the prices they charged grew at the slowest pace since October 2020.

Companies across the manufacturing and services sectors turned a bit less optimistic about their prospects over the next 12 months, with the degree of confidence about future output falling back to its lowest in three months.