Consumers face the sharpest rise in prices charged by services firms in almost a decade, according to a survey, as a range of businesses from hotels to IT companies seek to protect profits against rising costs since the EU referendum.
According to a survey from data firm IHS Markit and the Chartered Institute of Procurement and Supply (CIPS), companies in the services industries – such as hotels and restaurants, IT, financial services, transport and communications – blamed the weak pound since the Brexit vote for forcing them to drive up prices in November at the fastest pace since February 2008. That was the the second-fastest rise seen since the survey began in 1996.
The snapshot of the largest sector in the economy will worry consumers already caught by weak wage growth and rising inflation. It comes as businesses begin to focus on protecting their profits by passing on higher costs for food, fuel and salaries.
The warning comes as business activity in November grew at a slower pace than in October, amid a slight slowdown in new work available to services firms. The rate of staff hiring was also the slowest since March as a result of the rising cost of imported goods and subdued confidence due to mounting economic uncertainty.
The closely watched Markit/CIPS UK Services PMI (pdf) slipped from its six-month peak in October of 55.6 to 53.8 in November, missing economists expectations for a result of 55. The latest reading signalled a solid increase in the biggest sector of the UK economy, but showed the rate of expansion was slightly slower than the average for this year.
It was the 16th consecutive month that the index was above the 50 mark, which separates economic growth from contraction.
The warning for higher prices charged to customers will confirm the reasons for the Bank of England’s interest rate hike last month, according to Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics. He said the reading supported the Bank’s “sombre conclusion” that rising prices can accompany even modest rates of economic growth.
Threadneedle Street raised interest rates for the first time in a decade in November, up from 0.25% to 0.5%, as the Bank’s governor Mark Carney said the vote to leave the EU had constrained the speed at which the UK could grow before prices begin to spiral. The UK recorded a growth rate of 0.4% in the three months to September, much lower than the US and eurozone during the same period.
Service sector companies reported an uptick in business and consumer spending in the November PMI survey, although some firms noted that stretched budgets and uncertainty as a consequence of Brexit had acted as a brake on growth.
The report follows improvements for the smaller manufacturing and construction sectors this week, which combine to suggest that the UK economy may be running at a growth rate of about 0.4% or 0.5% in the final quarter of the year, according to Ruth Gregory, UK economist at the Capital Economics consultancy. She said that inflation fuelled by a weak pound would gradually fade, putting consumer spending on a firmer footing.
Chris Williamson, chief business economist at IHS Markit said the slower pace of growth came as a disappointment after the improved performances for both manufacturing and construction. Still, for now, he said the survey data indicates a “sufficient degree of optimism in pockets of the economy, notably financial services, tourism, manufacturing and house building”.
“Despite the weaker service sector expansion, the latest survey data indicate that the economy is on course to enjoy robust growth in the fourth quarter,” he said.