'Green light' for interest-rate rise after private-sector cost inflation soars

The UK's private sector saw cost inflation hit another record high this month amid rising wage, fuel and energy costs for firms.

It came as growth in the private sector dipped only marginally as companies reported a continued increase in consumer demand. The closely-followed IHS Markit/Chartered Institute of Procurement & Supply (Cips) flash UK composite purchasing managers' index (PMI) report hit a reading of 57.7 for November, down from 57.8 last month.

Scores above 50 represent growth, while anything below that is a contraction. The flash figures are preliminary and based on responses from most of the survey participants.

Chris Williamson, chief business economist at IHS Markit, said the survey's latest findings could help usher in an interest-rate increase next month after the Bank of England surprisingly decided to hold rates earlier this month.

Chris Williamson of IHS Markit said the survey's latest findings could help usher in an interest-rate increase by the Bank of England next month. Picture: Tolga Akmen/AFP via Getty Images.

He said: "A combination of sustained buoyant business growth, further job market gains and record inflationary pressures gives a green light for interest rates to rise in December.

"Output growth across manufacturing and services came in slightly faster than expected in November, albeit heavily skewed towards the service sector as factories continued to struggle with supply shortages and falling exports."

The UK's services industry drove growth over the period, as it reported a 58.6 reading for November amid the strongest increase in new business since June 2018.

Despite recovering sales volumes, firms in the services sector said margins were put under pressure by the surge in input costs and a slower increase in prices charged to clients.

Meanwhile, the manufacturing sector saw growth improve but it remained comparably modest, with a 52.9 reading for the month. The report highlighted that "severe shortages of materials and staff held back growth and led to escalating input prices".

Pressures

Duncan Brock, group director at Cips, said: "Another survey record of rising costs for fuel and wage demands led to the highest inflationary pressures since January 1998 as 63 per cent of supply chain managers paid more for their materials.

"Shortages of staff and production stoppages due to a lack of supplies added to frustrations in the manufacturing sector as some machines fell silent."

Martin Beck, chief economic advisor to the EY Item Club, said: “November’s flash composite PMI of 57.7, down from 57.8 in October, slightly eroded the previous month’s unexpectedly strong gain. But it was comfortably above the long-run average of 54.2, as well as the eighth month in a row to exceed the 50 ‘no-change’ mark which separates the IHS Markit/CIPS survey’s measure of expansion from contraction.

“Supply-side issues contributed to cost and price growth running at record, or near-record, rates, although service-providers indicated a slight slowdown in output price inflation.

"Given the cost of living challenges faced by consumers – from rising prices, to tax rises and the prospect of higher interest rates – the balance between growth and inflation is looking less positive. But a strong jobs market and the healthy financial position of households and businesses mean the EY Item Club doubts that the current ‘growthflation’ will tip over into ‘stagflation’.”

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