Strong competition among services firms helped push services inflation to its lowest level in three-and-a-half years, a closely watched survey suggests.
Price growth in the services sector fell to its weakest level since February 2021 despite another large increase in labour costs, according to S&P’s purchasing managers’ index (PMI).
The survey noted that “competitive pressures continued to limit pricing power,” which helped to contain inflationary pressures.
The slowdown in prices charged inflation came despite a “sharp and accelerated” increase in the cost burden facing firms.
This was largely due to strong salary growth, but the survey also pointed to “higher shipping costs and greater expenditure on technology services”.
The survey points to the delicate balancing facing policymakers at the Bank of England. If the Bank cuts rates too much while inflationary pressures remain high, this would support demand and give firms greater pricing power, enabling them to pass on higher costs to consumers.
Conversely, keeping rates elevated to quash inflationary pressures could crush the economy’s momentum.
The survey also showed that the services sector remained in expansion for the tenth consecutive month in September, although momentum had slowed from August.
The PMI stood at 52.4 in September, down from 53.7 in August and lower than the ‘flash’ estimate of 52.8.
Survey respondents pointed to another “robust increase” in new business volumes with lower borrowing costs and domestic stability helping to support demand. This compensated for weak demand from the UK’s major export partners.
“Robust domestic demand has been recorded throughout the third quarter of 2024, helping to offset a headwind from lacklustre export sales,” Tim Moore, economics director at S&P Global Market Intelligence said.
Like other surveys, the PMI suggested that uncertainty around the budget had encouraged a “wait-and-see” for firms making investment decisions.
However, despite concerns about the budget, business confidence had actually improved compared to August. “Positive sentiment was linked to softening inflationary pressures and stable domestic economic conditions,” the survey said.
“The September PMI surveys suggest that the UK economy is still on a positive trajectory, with improving order books accompanied by cooling inflationary pressures,” Moore said.