Rising price pressures in the sector are prompting economists to reassess the case for further interest rate increases
New data showing a sharp acceleration in UK services sector inflation have raised questions over whether the Bank of England's monetary policy committee (MPC) will move to raise interest rates sooner than previously anticipated.
The S&P Global/CIPS services purchasing managers' index (PMI) climbed to 52.7 in April from 50.5 in March, beating expectations and contributing to a composite PMI reading of 52.6, up from 50.3. While the figures signal continued economic expansion, it is the accompanying price data that has drawn the most attention from analysts.
Firms reported a sharp rise in prices charged during April, partly attributed to fuel surcharges linked to the conflict in Iran. The input prices measure for the services sector reached its highest level since mid-2022, while output prices hit their highest point since January 2023.
Economists noted that the figures are consistent with underlying services inflation accelerating to above 6% year-on-year — well above the 4.5% services CPI reading published by the Office for National Statistics for March.
"This provides more reason for the MPC to focus on surging prices rather than weakening activity," said Robert Wood (pictured right), chief economist at Pantheon Macroeconomics.
He noted that "rocketing prices" in the PMI survey suggested inflation was accelerating beyond the MPC's benign Scenario A published the previous week, though he cautioned the survey may be overstating the pace of acceleration relative to the more reliable Decision Maker Panel price expectations measure.
Pantheon expects two rate rises this year, followed by three cuts across 2027 and early 2028.
Read more: UK construction output falls as cost inflation accelerates
Thomas Pugh (pictured right), economist at RSM UK, said the economy was "holding up well" even as input costs surged, making further tightening more probable if current trends persisted.
"For the Bank of England, rising inflation indicators along with resilient output balances, if they are maintained over the next few months, makes future rate hikes more likely," Pugh said.
"Everything depends on how energy prices move going forward, but we still think the ultimate impact of the crisis will be a rising unemployment rate and weaker economic growth, which means any tightening cycle will be short and shallow. But clearly, the risk of rate hikes is rising."
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