The UK services sector, encompassing shops, hotels, bars and banks, faced the biggest one-month jump in costs in 20 years in October in the latest sign that the sharp fall in the pound since the Brexit vote is starting to push inflation higher.
The latest snapshot from the Markit/CIPS services PMI showed the sector grew at the fastest rate since January last month, beating economists’ expectations.
However, Markit’s chief business economist Chris Williamson said the spike in firms’ costs was “the ugly flipside of the weaker pound”, which has fallen about 17% against the dollar since the Brexit vote.
The input costs measure of the services PMI – an indicator of what companies are paying to buy products and raw materials – jumped to 64.9 last month from 58.9 in September, where anything above 50 signals a rise. It was the biggest monthly spike since the survey began two decades ago and the highest costs figure since March 2011.
The headline measure of the services PMI rose to 54.5 in October, from 52.6 in September. Williamson said the survey suggested the broader economy was on track.
Williamson said: “An encouraging picture of the economy gaining further growth momentum in October is marred by news that inflationary pressures are rising rapidly.
“If sustained, the increase in prices threatens to curb both corporate hiring and consumer spending, as firms seek to reduce staff costs and households see their pay eroded by rising inflation.”
The official rate of annual inflation jumped to a near two-year high of 1% in September, and economists at the National Institute of Economic and Social Research are forecasting inflation will hit almost 4% in 2017.
The UK service sector is crucial to national income, accounting for more than three-quarters of the economy. It includes restaurants, hotels and bars, as well as professional and business services.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said services PMI, and equivalent surveys from the manufacturing and construction sectors published earlier in the week, suggested the economy was on track to grow by 0.5% in the fourth quarter, matching the rate in the third quarter.
Tombs said: “The pick-up in the services PMI in October to its highest level since January signals that the economy still is showing little adverse impact of the Brexit vote, but the risk of a renewed relapse in growth, caused by rising inflation and corporate caution due to hard Brexit risks, remains high.”
This article was written by Angela Monaghan, for theguardian.com on Thursday 3rd November 2016 10.51 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010