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Inflation and rising energy bills hit UK service sector

inflation Following Shot of Heavy Industry Engineers Walking Through Manufacturing Factory. In the Background Professionals Working on Construction of Oil, Gas and Fuel Pipeline Transportation Products
A rise in inflation is hurting every business sector according CBI Head of Economic Surveys, Charlotte Dendy. Photo: Getty

UK firms reported surging selling prices, record high cost pressures, and gloomy outlooks for the future, according to a CBI survey of the service sector.

The percentage of firms surveyed which said they are feeling cost pressures rose from 64% to 69%, even though growth is set to remain strong next quarter at 65%.

The percentage of firms which reported increasing their average selling price increased from 23% to 31%, with businesses expected to continue passing on costs to customers next quarter.

Charlotte Dendy, CBI head of economic surveys, said: “There are slim pickings for those looking for positive signals in the services sector over the last quarter. Just as rising inflation is hurting households and every business sector, the services industry is no different.

Read more: UK economy grinds to a near halt on the back of dwindling customer demand

“Average selling prices grew at a record pace and profitability in the sector fell once more, with uncertainty over demand the main reason why investment intentions deteriorated. Nevertheless, business & professional services fared somewhat better than consumer services, with employment continuing to grow, as well as investment in training and IT."

The survey, which was based on responses from 199 services firms, also showed that profitability had dropped down by 11% in the quarter to August, similar to the previous quarter which was down by 12%, with profits expected to decline again and more quickly over the next quarter - when they are expected to fall by a further 25%.

The rise cost of producing and selling goods has coincided with the cost of living crisis which has impacted households and businesses nationwide.

Inflation has hit 10.1% and there have been warnings that the average household energy bills could go as high as £700 a month from January 2023.

Read more: UK households face £700 a month energy bills from January

When it came to consumer services, the survey showed that business volumes dropped by 37%, for the first time in over a year, with the pace of decline set to ease slightly next quarter by 29%.

In the three months to August, cost grew at the quickest rate on record: 88%. Over the next quarter this is expected to ease slightly as it is predicted to be 77%.

In the quickest pace since May 2006, the average selling price grew by 52%, with growth expected to increase even further over the next three months by 56%.

Profitability continued to fall in the three months to August by 64%, the sharpest rate in the last two years. Profits are expected to fall further next month by 84%, the weakest expectations on record.

Read more: UK inflation hits 10.1% as food prices hit 40-year high

“Come 5 September, business will be looking to the next prime minister to move swiftly and effectively to help shore up confidence. That means supporting vulnerable households and businesses with high energy prices and setting out plans to get the UK economy back on a growth trajectory," Dendy said.

Watch: What is inflation and why is it important?