U.K. Services Strength ‘Marred’ by Accelerating Inflation

  • PMI index gains to 54.5 in October from 52.6 in September
  • Price rises risk curbing hiring and consumer spending: Markit

Growth of the U.K.’s dominant services industry accelerated in October, emphasizing the economy’s resilience since the Brexit vote.

IHS Markit’s services Purchasing Managers Index rose to 54.5 in October, the highest since January and far above the 52.5 forecast in a Bloomberg survey. It also marked a third month above the 50 mark separating expansion from contraction.

Companies said the weaker pound helped to lift foreign demand, though the currency is also having an inflationary impact. The report showed that input prices jumped the most since March 2011. While the U.K. economy has been “largely undisrupted” by the decision to leave the European Union, rising raw material costs present downside risks, Office for National Statistics Chief Economist Nick Vaughan said on Thursday.

“An encouraging picture of the economy gaining further growth momentum in October is marred by news that inflationary pressures are rising rapidly,” said Chris Williamson, chief business economist at Markit. “If sustained, the increase in prices threatens to curb both corporate hiring and consumer spending.”

The pound extended gains against the dollar after the data was published and was at $1.2361 as of 9:58 a.m. London time, up 0.5 percent since Wednesday.

The report comes as Bank of England officials prepare to announce their latest policy decision alongside new forecasts for growth and inflation. Growth has so far held up better than many anticipated since the EU referendum in June, with the economy expanding 0.5 percent in the third quarter.

Cost Increase

“The BOE will believe that a slowdown in growth is coming, but right now there is not much sign,” said David Tinsley, Chief European Economist at Exane BNP Paribas in London. “We expect no change in policy but but the Monetary Policy Committee will not want to convey a ‘hawkish’ view, and indeed will even leave the door open to possible further easing.”

In its release on Thursday, Markit said the acceleration in costs was the biggest in the survey’s history.

The report follows other Markit surveys this week showing manufacturing and construction both grew in October. The composite index of all three sectors rose to 54.6, the highest since January.

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