UK inflation pressures mount as bounce-back slows only slightly - PMI

By William Schomberg

LONDON (Reuters) - Inflation pressures faced by British firms hit record levels this month, and growth in the private sector cooled only slightly from an all-time high in May when coronavirus restrictions were lifted, a survey showed on Wednesday.

The preliminary reading of the IHS Markit/CIPS UK Composite Purchasing Managers' Index (PMI) pointed to one of the strongest monthly improvements in business activity since 1998, with a reading of 61.7 - not far off May's unprecedented 62.9.

Input costs matched a previous record increase from June 2008 and prices charged by firms rose by the largest amount since these records began in 1999, as disruption to supply chains caused a scramble for components.

Inflation faced by consumers could now have a lot further to rise after breaking above the Bank of England's 2% target last month, said Chris Williamson, chief business economist at IHS Markit, which compiles the survey.

The BoE is not expected to change monetary policy when it announces the outcome of its June policy meeting on Thursday but investors are waiting to hear whether it is sticking to its view that the rise in inflation is likely to prove transient.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said the PMI showed the private sector was struggling to keep up with the vaccine-driven rebound in demand.

"Today's data will strengthen the conviction of those on the Monetary Policy Committee who believe that extraordinary levels of policy support are no longer warranted," he said.

But Samuel Tombs, at consultancy Pantheon Macroeconomics, said an expected rise in unemployment as the government's job protection scheme winds down over the next three months, and an easing of COVID-19 bottleneck pressures on prices, meant the BoE would probably not be swayed by short-term inflation signals.

BREXIT EFFECT

Prime Minister Boris Johnson allowed bars, restaurants and other hospitality firms in England to resume indoor service in mid-May. But last week he delayed the removal of the last social-distancing rules after COVID-19 cases rose again.

There were signs in the PMI survey that the rebound might be slowing as new orders cooled and manufacturers also felt the effects of Brexit after Britain left the European Union's single market on Jan. 1.

Tombs said British manufacturers' export orders undershot those of their euro zone peers for the sixth consecutive month, and by a larger margin than in May.

The PMI survey showed hiring rose by a record amount in June but many firms were unable to operate at full capacity because of staff shortages. The lack of candidates also pushed up wages.

Williamson said that could add to worries that the recent spike in inflation will last longer than the BoE has suggested.

The PMI for the services sector dipped to 61.7 in June from 62.9 in May. The index for the smaller manufacturing sector fell to 64.2 from 65.6.

Sentiment about the economic outlook, while still positive, fell to its lowest in five months.

(Writing by William Schomberg; Editing by Catherine Evans)