25% of UK service companies see an increase in prices for customers

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In June, a quarter of UK services companies reported a price increase for their customers, highlighting ongoing inflationary pressures in the British economy, according to a highly influential survey.

The Flash S&P Global / Cips UK purchasing manager index (PMI), a monthly measure of business activity, revealed that 25% of service providers reported an increase in output prices in June compared to May, while only 4% reported a decrease.

Meanwhile, separate data from the Office for National Statistics showed unexpected resilience in consumer demand, with retail sales rising 0.3% between April and May, exceeding the 0.2% contraction forecasted by economists.

EY Item Club’s chief economic adviser, Martin Beck, stated that the widespread increase in service output prices would provide reassurance to the Bank of England’s Monetary Policy Committee regarding their decision to raise interest rates by 50bp.

In a surprising move, the Bank of England raised interest rates from 4.5% to 5% on Thursday, the highest level since 2008, driven by stronger than anticipated wage growth and inflation data.

Paul Dales, an economist at Capital Economics, commented that June’s PMI survey results would not alleviate the Bank of England’s concerns about inflation, indicating that the recent interest rate increase may not be the last.

Interviews conducted for the PMI survey between June 12 and 21 revealed that approximately 40% of service businesses reported increased costs, driven by higher wages. Additionally, the sector experienced the highest level of hiring since September of the previous year.

RSM UK economist Thomas Pugh noted that these figures would be a concern for the Monetary Policy Committee, which has linked future interest rate rises to the strength of the labor market.

The survey also indicated a slight easing of overall activity in June. The UK composite PMI index, which tracks both manufacturing and services activity, dropped to its lowest level in three months at 52.8. Although this was slightly below the economists’ forecast of 53.7, it remains above the 50 mark, signaling expansion for the majority of businesses.

The increase in retail sales was driven by higher consumer spending on summer goods, including outdoor items and summer clothing. Garden centers and DIY stores also experienced growth as the good weather encouraged people to invest in home and garden improvements. Additionally, fuel sales rebounded in May after a dip in April.

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Ruth Gregory, economist at Capital Economics, stated that the continued rebound in retail sales volumes in May indicates that the recent resilience in economic activity has not waned. Furthermore, UK consumer confidence rose for the fifth consecutive month in June, reaching the highest level since January 2022.

Some economists suggested that the extra bank holiday for King Charles’ coronation on May 8, which has not been accounted for in the Office for National Statistics seasonal adjustment, played a role in May’s sales growth.

However, the impact of high inflation remained evident. While shoppers spent 17% more in May compared to February 2020, they purchased 0.8% fewer goods due to the rapid increase in consumer prices, affecting affordability.

According to Gregory, it is too early to determine whether the rebound in retail sales will persist or if the economy will avoid a recession, especially considering that this week’s interest rate increase is unlikely to be the last.