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U.K. Services Firms Hike Prices as Material Costs, Wages Climb

U.K. Services Firms Hike Prices as Material Costs, Wages Climb

U.K. services firms increased their prices aggressively in January in an attempt to cover rising raw material costs, wages and energy bills, according to a survey of purchasing managers.

Business confidence and employment also rose, with companies in the hospitality, leisure and travel sectors anticipating a quick rebound after they were hit this month by restrictions to contain the omicron outbreak, the report by IHS Markit found. Other parts of the services industry performed strongly. 

“This all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting,” said Chris Williamson, chief business economist at Markit.

U.K. Services Firms Hike Prices as Material Costs, Wages Climb

Financial markets are all-but fully pricing in a quarter-point rise in the benchmark rate to 0.5% when BOE policy makers meet next week. Inflation is forecast to top 6% in April, more than triple their target rate. Some officials fear a wage-price cycle could take hold unless monetary policy is tightened.

What Bloomberg Economics Says ...

“The composite PMI slipped in January as the omicron variant of Covid-19 kept a lid on demand for consumer facing services. We expect the economy to contract in December and January, but there are good reasons to envisage a rebound in February. The big challenge ahead is the fast-approaching squeeze on living standards as energy prices surge and inflation nears 6.5%.”

--Dan Hanson, Bloomberg Economics. Click for the INSIGHT.

An index of service-sector activity fell marginally to 53.3 in January, the lowest for almost a year. A modest increase was forecast by economists. However, the decline was largely due to consumers staying at home amid a surge in omicron cases, an impact that’s likely to prove short-lived now restrictions to curb the spread of the Covid-19 variant are being lifted. 

Areas less affected by omicron such as financial services performed strongly and inflationary pressures continued to build, with input and output prices rising at their second-fastest pace on record. 

“Survey respondents overwhelmingly noted that higher raw material costs, staff wages and energy bills had led to repricing of their services,” Markit said.

For manufacturers, raw materials became more available this month, easing input-price inflation and allowing them to step up production. 

But the sector also experienced the worst month for new orders since the lockdown a year ago, a slump blamed on fewer sales to customers hit by omicron curbs and reduced demand from companies that made their purchases early to beat new price lists for 2022. Factories continued to stockpile goods, with some citing delays from suppliers in China. 

Overall, an index of factory activity slipped to 56.9, the lowest since last February. A gauge of total private-sector activity dipped to 53.4, also an 11-month low. All the headline readings indicate healthy growth.

Across all parts of the private sector “businesses commented on capacity constraints and rising backlogs of work as a result of staff absences in January,” Markit said.

©2022 Bloomberg L.P.