UK's vast services sector on recovery track but inflation woes could trigger early rate rise

Britain's crucial services sector got back on the recovery track last month, but firms faced record cost pressures amid rising inflation, new figures reveal.

The closely-watched IHS Markit/Cips UK Services PMI recorded a reading of 59.1 for October, up from 55.4 in September and the strongest outcome since July after growth had recently stalled. Any score above 50 denotes growth.

The survey put the acceleration down to the reopening of the UK economy and looser international travel restrictions, with the first increase in new order growth for five months and the best month for export sales since June 2018.

But supply chain disruption, staff shortages and surging fuel and energy costs saw operating expenses and prices charged by service providers ramp up at the steepest rates since the survey began in July 1996.

The sprawling services sector includes the likes of hospitality businesses. Picture: Lisa Ferguson

It comes as the Bank of England debates an early increase in interest rates to attempt to keep a lid on inflation, which some economists predict could rise above 5 per cent in the coming months.

The woes and cost pressures have had an impact on business optimism, which fell to its lowest level since March, according to the latest PMI snapshot.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply (Cips), said: "The dominant service sector in the UK economy had a surprisingly good month in October with a strong uptick in overall output, job creation and new orders as business and consumers began to spend again, unfettered by lockdown and pandemic restrictions.

"This rise in activity was driven by the domestic market but also export orders rising to the largest extent since 2018 as travel opportunities opened up and pandemic savings were spent on holidays and hospitality.

"Escalating business costs remain deeply concerning as salaries rocketed along with fuel and energy costs, and material shortages as a result of supply chain disorder."

He added: "The seemingly likely rise in interest rates this week may take some of the heat out of the overinflating UK economy but will also result in additional pressure on some household budgets, threatening to cut off this stream of good fortune early next year."

Jay Mawji, managing director of the global liquidity provider IX Prime, said: “With Britain’s sprawling services sector firmly back in the groove as international travel restrictions ease, rapidly rising prices have put a huge inflationary cheque in the post.

“While the uptick in new orders and services sector activity is welcome, this latest snapshot of an industry that accounts for four-fifths of the UK economy reveals an alarming inflationary flipside.

“Service industries, which together account for 82 per cent of UK jobs, are now seeing their costs spike faster than at any time in the past quarter of a century.

“So far this inflation has mostly hammered profit margins. But as inflation feeds into the wider economy, it’s likely to trigger an interest rate rise from the Bank of England.”

The PMI report said the readings show a "widening gap" between service and manufacturing growth, coming after data on Monday revealed factory activity grew at its slowest pace for eight months due to supply and staff shortages.

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