Brexit: UK services sector hit by fastest ever inflation rise

Trouble may be in store as the price of inputs such as fuel, salaries and food jumps at quickest rate since the PMI survey began 20 years ago

Ben Chapman
Thursday 03 November 2016 15:02
The sector includes restaurant shops and business services such as accontancy - it accounts for more than three quarters of the economy
The sector includes restaurant shops and business services such as accontancy - it accounts for more than three quarters of the economy

Britain’s services sector continued to grow in October, but costs rose by their fastest in 20 years indicating the weakened pound could mean tough times ahead.

The respected services Purchasing Managers’ Index (PMI) hit 54.5 in October, up from 52.6. Anything above 50 indicates growth.

“The dominant UK service sector moved up a gear at the start of the final quarter of 2016,” the report said.

Prices for services from restaurants to shops to accountants, which make up the majority of the economy, look set to rise sharply however. Materials including fuel, salaries and food saw their biggest monthly price rise since the survey began 20 years ago. This was slightly offset by the boost to export activity and tourism, which benefited from the cheap currency.

The pound rallied on Thursday after the High Court ruled Parliament would have to vote on Brexit, but still remains 18 per cent below its pre-referendum levels, leading to higher inflation.

Chris Williamson, chief business economist at IHS Markit, said business activity growth was in line with economic growth of 0.4 per cent to 0.5 per cent in the fourth quarter.

“Manufacturing is leading the expansion as exporters benefit from the weaker pound, but services growth is also reviving and construction is being boosted by renewed housebuilding.

“The ugly flip side of the weaker pound is clearly evident, however, with the rate of increase of service providers' costs showing the largest monthly acceleration seen in 20 years of survey data collection.”

New contracts grew at their fastest rate for nine months, with employment also rising for the third month in a row, the PMI report said.

Howard Archer, chief UK and European economist at IHS Global Insight, predicted firms would struggle in 2017 as “the fundamentals for consumers weaken markedly” and uncertainty around the Brexit process hits confidence.

The update on the services sector comes after the manufacturing sector held steady last month, while increased housebuilding helped construction activity hit a seven-month high.

The ONS disclosed in October that the UK economy avoided an expected slowdown in the three months after the Brexit vote thanks to a “strong performance” from the services sector.

Additional reporting by PA

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