Higher wage costs force UK services firms to push up prices

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British services firms reported the strongest input cost pressures in three months in May and a steep increase in prices charged against a backdrop of solid growth, adding further pressure on the Bank of England to keep raising interest rates.

The final S&P Global/CIPS UK Services Purchasing Managers' Index (PMI) came in at 55.2, down slightly from April's one-year high of 55.9 in April, and representing marginally faster growth than the provisional reading of 55.1 released on May 23.

Input cost inflation edged up to the highest since February, and although it is well below its all-time peak a year ago, it remains higher than it was before the COVID-19 pandemic. This is likely to bolster the Bank of England's concern that the British economy now faces persistent inflation pressures.

"Higher salary payments more than offset lower fuel costs, which meant that overall input price inflation edged up," said Tim Moore, economics director at S&P Global Market Intelligence.

Businesses were passing much of the costs for staffing and raw materials such as food on to consumers. However, some customers were resisting price rises, so the increase in prices charged was the second-smallest since August 2021, Moore said.

The BoE is closely monitoring how companies set wages and prices as it attempts to return consumer price inflation to its 2% target, after seven months of double-digit inflation.

A separate BoE survey of businesses last week showed expectations for selling prices and wages in the coming 12 months moved lower in May, although their predictions for inflation rose.

S&P Global said employment rose for the fifth month in a row in May and improved staff availability helped businesses fill vacancies, although the rate of job creation was much softer than the average seen in 2022.

Business optimism for the year ahead was the second-strongest since March last year, with 50% of firms expecting activity to grow versus 10% who expect a decline.

The composite PMI, which combines the services survey with last week's subdued manufacturing PMI, fell to 54.0 in May from the one-year high of 54.9 set in April.

Higher wage costs force UK services firms to push up prices

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