Inflation Builds as U.K. Economy Keeps Up Recovery Momentum

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Business boomed across the U.K. private sector this month, and inflation pressures mounted as the country continued to emerge from lockdown.

IHS Markit said its key index of activity was only slightly below the record posted in May, with firms responding to rising workloads by taking on staff at the fastest pace since it began collecting data in 1998. Optimism about the coming year was widespread at manufacturers and services companies alike.

“Businesses are reporting an ongoing surge in demand in June as the economy reopens, led by the hospitality sector, meaning the second quarter looks to have seen economic growth rebound very sharply from the first quarter’s decline,” said Chris Williamson, chief business economist at IHS Markit.

Inflation Builds as U.K. Economy Keeps Up Recovery Momentum

However, the good news came with a warning that pandemic-disrupted supply chains were struggling to keep up with demand, leading to shortages of goods such as semiconductors and rapidly increasing prices.

There was also evidence that labor shortages were pushing up wage costs, suggesting the recent spike in inflation above the Bank of England’s 2% target could prove “stickier” than initially hoped. The purchasing managers survey found:

  • The composite output index stood at 61.7 in June versus 62.9 in May. Median forecast in Bloomberg survey was 62.5
  • Input-price inflation matched the record posted in 2008, with both manufacturers and services firms affected
  • Output-price inflation hit a new record as firms passed on higher costs to customers
  • Manufacturers no longer able to absorb input costs; services sector sees “considerably” higher prices for food and hospitality

While the pace of expansion may have peaked, “full order books and a further loosening of virus-fighting restrictions should nevertheless ensure growth remains strong as we head through the summer,” Williamson said.

©2021 Bloomberg L.P.

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