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Price inflation accelerates at fastest pace on record in UK services sector

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·3-min read
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Price inflation accelerates at fastest pace on record in UK services sector
Supply chain disruptions and shortages of staff hit UK services, especially the hospitality sector. Photo: Vuk Valcic / SOPA Images/Sipa USA

"Severe supply constraints" and "escalating inflationary pressures" contributed to the slowest rise in new orders since the end of winter lockdowns for the UK services sector in September.

According to monthly data from IHS Markit, rapid rises in fuel, energy and staff costs were passed on to customers in September. 

The rate of prices charged inflation accelerated sharply since August and was the fastest since the survey began in 1996.

"Tight constraints on business capacity and rampant supply chain uncertainty meant that service providers have become more willing to pass on higher costs to customers," said Tim Moore, economics director at IHS Markit.

"The latest rise in average prices charged by UK service sector firms was the fastest in over 25 years of data collection, with many businesses reporting more frequent reviews of pricing due to escalating cost increases by suppliers."

Exactly half of the survey panel reported an increase in their average cost burdens, while only 1% signalled a reduction. This pointed to the second-fastest rate of cost inflation since the survey began 25 years ago, exceeded only by that seen in July.

The percentage of service providers reporting an increase in their average prices charged jumped from 17% in August to 24% in September. 

Service sector businesses widely noted that constrained supply, higher transport costs and rising salary payments had all pushed up inflationary pressures as customer demand recovered.

The headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index registered 55.4 in September, up slightly from August's six-month low (55.0) and well inside expansion territory. 

Although the latest reading signalled a solid increase in overall business activity, the rate of expansion was still much weaker than the peak seen in May (62.9). 

Around 34% of the survey panel reported an increase in output during September, while only 13% signalled a reduction. 

Read more: Greggs warns of rising costs, labour shortages and supply chain woes

Higher levels of activity were mostly attributed to robust confidence among clients and favourable business conditions due to the end of pandemic restrictions. However, those noting a fall in activity often commented on supply chain disruptions and shortages of staff, especially in the hospitality sector. 

New order growth weakened for the fourth month running in September. The latest increase in new business volumes was the slowest since order books returned to expansion in March. 

Staff shortages, supply issues and the end of the stamp duty holiday were among the most commonly cited reasons for softer demand. 

A lack of candidates to fill vacancies and persistently high numbers of departing staff acted as a considerable brake on employment growth during September. Reports from survey respondents suggested that the slowdown in job creation from August's record high also reflected some redundancies as furlough arrangements ended.

Watch: Will Interest rates stay low forever?

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