UK services sector continues recovery amid mounting inflation fears

The UK services sector continues to rebound from the pandemic, but fears about inflation are gathering pace, show new figures published today.

The latest IHS Markit/CIPS UK Services PMI reached 62.4 in June, down slightly from 62.9 in May, but still the second-highest reading since October 2013.

A reading above 50 indicates an expansion in business activity.

Despite the robust performance, the figures suggest concerns that intense inflation pressures may be flowing into parts of the UK economy are beginning to materialise.

Read more: British savings jump during lockdown as UK GDP slips

The rise in operating expenses among service sector firms was the steepest since the survey began 25 years ago.

Companies attributed these higher operating costs to having to increase staff wages, higher raw material prices and greater transportation charges.

Tim Moore, Economics Director at IHS Markit, says: “The service sector recovery remained in full swing during June as looser pandemic restrictions released pent up demand for business and consumer services.”

“Record rates of input cost and prices charged inflation across the service sector, reflecting higher commodity prices, transport shortages and staff wages. Imbalanced supply and demand was the main driver, while the roll-back of pandemic discounting by some service providers amplified the latest round of price hikes.”

Rampant demand put services firms under severe strain to increase supply to cope with strong consumer spending. June’s surge in backlogs of work was the steepest since the survey began in July 1996, with many firms reporting that capacity constraints and staff shortages meant they could not complete work quick enough.

Further gains in new orders triggered a rise in output volumes in June, although new business growth edged down slightly from May.

Recruitment activity climbed sharply as firms rushed to scale staffing levels to cope with surging demand. Job creation was the strongest since June 2014.

“Backlogs of work increased at a faster pace than any other time since the survey began in July 1996, despite job creation reaching a seven-year high. Difficulties filling staff vacancies were reported by survey respondents in all parts of the service economy during June, with hospitality and leisure experiencing the greatest squeeze” Moore said.

“Staff shortages and delays among suppliers were by far the most commonly cited constraints on growth in June. International travel restrictions, especially uncertainty about quarantine polices at home and abroad, were also a prominent source of anxiety. These disruptions to inbound and outbound travel contributed to another slight dip in export sales.”

Martin Beck, senior economic advisor to the EY Item Club, says: “It is clear that the four-week delay to the full removal of restrictions has not thrown the recovery off track.”

“Firms reported very strong growth in orders, which came exclusively from the domestic market, and a rapid pace of job creation.”

Read more: Haldane: Inflation will reach four per cent this year