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UK firms hike prices as private sector growth slows

prices  A staff member works at PALLITE, a designer and manufacturer of social distancing screens and desks from recyclable paper board, amid the outbreak of the coronavirus disease (COVID-19), in Wellingborough, Britain, July 20, 2020. REUTERS/Andrew Boyers
UK businesses are charging higher prices for their services. Photo: Andrew Boyers/Reuters (Andrew Boyers / reuters)

UK firms in the services sector increased prices at a rapid pace in May, according to the latest survey of purchasing managers.

The prices charged by private sector companies increased at a historically steep pace in May, although the rate of inflation was the second-lowest since August 2021, the S&P Global/CIPS flash UK purchasing managers' index revealed.

Production levels at manufacturing firms fell at the fastest pace in four months.

This pulled the S&P Global/CIPS flash UK composite output index down to 53.9 in May, from a 12-month high of 54.9 in April. Any reading over 50 shows growth.

Chris Williamson, chief business economist at S&P Global Market Intelligence said: “The UK economy enjoyed another month of strong growth in May, with the expansion continuing to be driven by surging post-pandemic demand in the service sector, notably from consumers and for financial services, with hospitality activities buoyed further by the Coronation of King Charles.

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Read more: UK households paying an extra £833 on groceries as food inflation remains high

“It's a different story in manufacturing, where spending is being diverted away from goods to services, and many companies are also winding down their inventories, exacerbating the downturn in demand and driving both output and prices lower," Williamson said.

“The UK is therefore seeing a tale of two economies, with the divergence between manufacturing and services posing difficulties for policymakers.”

Firms reported a fractional easing in input price inflation, thanks to a drop in energy bills and raw material costs for factories. But strong wage inflation pushed up costs for services firms.

Read more: UK inflation set to fall back into single digits

The Bank of England is watching prices in the services sector as an indicator of how much inflation pressure remains in the economy. It has increased interest rates at 12 meetings in a row since late 2021 and is due to announce its next decision on June 22.

Ashley Webb, UK economist at Capital Economics, said the continued strength of the services economy could be driving stubborn inflation, whcih may force the Bank of England to raise rates further.

“May’s PMIs suggest that economic growth is being supported by the services sector while manufacturing activity continues to contract,” Webb said.

“The strength in services activity may be supporting persistent domestic inflationary pressures, which will increase the pressure on the Bank of England to raise interest rates above 4.50% at the next policy meeting in June.”

Economists at Capital had previously expected interest rates would peak at 4.5%, but stay there for a long period of time.

Watch: Grocery price inflation inches down amid £218m coronation sales spike

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