Optimism rises in service sector

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A glimmer of good news broke through the gathering clouds of recession yesterday, as the Chartered Institute of Purchasing and Supply revealed that managers in the service sector – representing about 70 per cent of the economy – are at their most optimistic about prospects in three months.

Although the poll reading of 49.4 still points to a contraction in the sector in coming months – any figure bellow 50 indicates generally lower orders and higher costs – it is not as bad as it has been recently. This comparatively optimistic development strengthens the already high chances that the Bank of England's Monetary Policy Committee will keep rate s on hold today, at 5 per cent.

While the passionate public plea for a cut in rates from the external MPC member David Blanchflower may have swung some votes in the direction of a cut, there is a widespread view among City economists that rates will drift down from November, after the worst of the inflationary "spike" is seen to be over. A more aggressive programme of rate cuts could follow in 2009.

Howard Archer, chief European and UK economist at Global Insight, said: "This is hardly a cause for celebration as it is still a very weak report that does little to alleviate belief that the economy is likely to contract over the second half of the year".

Having tested fresh record lows against other currencies, sterling bounced up on the news.

The CIPS noted that "the economic climate remained difficult". This, and a slowdown in the rate of increase of input costs and producer prices, could lend strength to the cause of the rate cutters.

The CIPS view was backed by the latest data from the British Retail Consortium, which said that food inflation showed its lowest monthly rise for five months to hit 10 per cent in August. The month-on-month rise was 0.3 per cent, down from 1.9 per cent in July and the lowest since March. The BRC director-general, Stephen Robertson, said the data "offered the prospect that we may be nearing the peak of food inflation".

Mr Robertson said: "There is some comfort. The growth rate of food inflation slowed, offering the prospect that we may be nearing the peak. Despite retailers facing rising fuel and electricity bills, shop prices are well below the official rate of inflation, as retailers shield customers from the full effects of rising costs."