Service sector revels in thaw to bounce back

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The Independent Online

Companies in the service sector – which accounts for 70 per cent of GDP – bounced back to business as usual in January, after the early heavy snow disrupted their activities in December.

But input prices are rising steeply, confirming the rising trend in inflation and adding to fears the Bank of England may raise interest rates sooner than expected.

The Chartered Institute for Purchasing and Supply's (Cips) latest survey of managers at the sharp end showed a remarkable resurgence in activity and confidence levels in January, with the headline index figure rising to 54.5 from 49.7 the previous month.

Any figure above 50 indicates future expansion in the sector, and, given similarly upbeat trends in construction and manufacturing already reported this week, in the economy as a whole. Indeed, the service sector reading is approaching the sort of normal levels seen before the credit crunch in 2007.

The discouraging news in the data was the input costs index – which jumped at its fastest rate since the series began in 1996, and in absolute terms, at 65.8 stands at it highest since 2008, up from 60.5 in December. Further evidence of inflationary pressures in the economy will disturb policymakers at the Bank of England, where the balance of opinion seems to be swinging towards rise in rates. The Monetary Policy Committee is due to meet again next week, and at the last session Andrew Sentance, a consistent proponent of higher rates, was joined by Martin Weale.

In recent days the deputy governor for monetary policy, Charles Bean, and the executive director for markets, Paul Fisher, have both made remarks interpreted as being "hawkish" on rates, as the surge in global commodity prices gathers pace. The Governor, Mervyn King, has sounded more "doveish" though, insisting that the MPC should see through the commodity price spike, even though inflation will peak at between 4 per cent and 5 per cent next year, and not return to the 2 per cent CPI target until later in 2012.

Yesterday the UN's Food and Agriculture Organisation said that its world food price index had hit another record high.

However, the rise in output costs – the prices faced by wholesalers, retailers and final consumers – is much less severe, with a rise to 51.4, up from 53.6.

David Noble, the chief executive at Cips said: "It now seems clear that it really was the weather that had such a negative impact on the economy in December as we are now back to 'pre-snow' growth.

"The Government shouldn't be cracking open the champagne just yet though as the underlying trend is still subdued and we are still some way off from the growth rates of activity and new business we saw last spring."

There was also some more emerging evidence of a "jobless recovery", partly as a consequence of the way that unemployment did not rise as fast in the recession as many feared.

George Buckley, the chief UK economist at Deutsche Bank said: "The business indices rebounded, though employment continues to contract at a similar pace to the previous month.

"This highlights the risk that following labour hoarding during the downturn, and given the existence of a degree of spare capacity in the system, companies may be reluctant to increase hiring in the future as quickly as they did in the aftermath of previous recessions."

The Cips survey was conducted by the Markit research group.