Service sector growth fastest since January, but inflation set to soar

03 Nov 2016

The Markit/CIPS services purchasing managers' index rose to 54.5 last month (52.6 in September), the highest level since January. The weaker sterling helped to generate new business, with the number of new contracts rising at its steepest rate in nine months.

The services sector, which includes shops, hotels, bars and banks, did however see the biggest one-month increase in costs for 20 years in October, as a result of the steep fall in the value of the pound which is pushing up purchasing prices for businesses, with inflation costs at the highest level since 2011.

Chris Williamson, chief business economist at IHS Markit said: "An encouraging picture of the economy gaining further growth momentum in October is marred by news that inflationary pressures are rising rapidly.

"The increase in prices threatens to curb both corporate hiring and consumer spending, as firms seek to reduce staff costs and households see their pay eroded by rising inflation," he said.

The news comes as the Bank of England publishes their quarterly inflation report, leaving interest rates unchanged and raising growth and inflation forecasts. Whilst the economy is doing better than expected, the BoE warns that inflation will rise from 1.3 per cent this year to 2.7 per cent in 2017. GDP growth in 2016 is now expected to be 2.2 per cent, up from 2.0 per cent forecast in August.

Commenting on the inflation report, Head of Economics at the British Chambers of Commerce, Suren Thiru, said: “Significantly, the new forecasts suggest that rising prices are likely to become an increasing impediment to the UK’s growth prospects, as imported inflation erodes consumer spending power and squeezes profit margins.

“The Bank of England is likely to face a tricky, near-term balancing act between supporting a slowing economy and managing a sustained period of rising inflation.”

In this difficult economic landscape, it is essential that business owners of UK SMEs maintain effective management of their company’s working capital and put process in place to survive and thrive in challenging times.

Contact our specialist advisers at Beavis Morgan for guidance and strategic advice to help in formulating plans for your business in order to strengthen its prospects of success, achieve growth and maximise wealth. Our partner business, BM Structured Finance, is also available to help with sourcing and restructuring debt finance for SME businesses.

For further information, contact Steve Govey or your usual Beavis Morgan Partner.