U.K. Is Warned of Stagflation Risk as Economy Cools, Prices Rise
The U.K. private sector had its weakest month since the height of the winter lockdown and inflation pressures escalated, adding to evidence that the recovery is running into significant headwinds.
IHS Markit said the further loss of momentum in September was most pronounced in the manufacturing sector, where demand softened and shortages of staff and materials acted as a brake on output. Factories and services firms raised prices aggressively in an attempt to pass on the soaring cost of wages, products and transportation.
“The September PMI data will add to worries that the U.K. economy is heading towards a bout of ‘stagflation,’ with growth continuing to trend lower while prices surge ever higher,” said IHS Markit’s Chief Business Economist Chris Williamson.
The figures sharpen the dilemma facing the Bank of England over when to start removing the monetary stimulus deployed to fight the coronavirus crisis. The central bank announces its latest policy decision at noon. In August, policy makers warned that modest interest-rate increases were likely in the coming years to bring inflation back to target.
A composite index of business activity slid to 54.1, the lowest level for seven months and below the 54.6 forecast in a Bloomberg survey. For manufacturers, the index plunged by 4 percentage points to 56.3, a far steeper decline than expected. The survey of purchasing managers also showed:
- A lack of staff and components hindered the food, drink and vehicle manufacturing sectors. Backlogs of work built up and supplier delivery times lengthened
- Manufacturers responded to supply shortages and rising prices by attempting to stockpile inputs. Expectations of future output fell and hiring cooled. Inflation pressures were more elevated than in the services sector
- Activity among services firms remained buoyant, though less so than in August. An index of price inflation in the sector reached the highest since the series began in 1996
- Brexit was widely cited as having exacerbated supply and labor market constraints, and was blamed for a loss of export sales during the month
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