UK services-sector businesses are still mostly raising prices, rather than cutting them

by administrator

In news that will not be cheering for the Bank of England (BoE) as it continues to struggle to drive down inflation, it has emerged that a far greater number of companies in the UK services sector are putting their prices up than are reducing them.

With the BoE’s base rate sitting at 5% at the time of typing – a 0.5% rise having been announced on 22nd June – it will displease the central bank to see evidence that firms are still passing on heightened costs to customers.

The data indicating this comes from the Flash S&P Global/Cips UK PMI index, as reported by the Financial Times (FT). The survey found that 25% of services companies upped their prices in June, compared to the mere 4% that reduced them.

This combination of events would seem to point to the BoE imminently heightening the base rate again, in a further attempt to put downward pressure on sticky inflation levels.

“Unsustainable” wage growth remains a major focus for the central bank

Concerns about a wage-price spiral evidently underpin much thinking at the BoE about its base rate at the moment. The central bank’s governor, Andrew Bailey, has recently described present levels of wage growth as “unsustainable”, although he has also criticised companies for “seeking to rebuild profit margins” by charging more for their services.

The PMI index involved interviews being collected between 12th and 21st June. Around 40% of the services businesses questioned via this process said that they had seen their costs climb, with higher wages a major driver of this. The sector’s reported pace of hiring was also the quickest it had been since September.

Economist Thomas Pugh, quoted by the FT, said that the data would be a source of concern for rate-setters at the BoE, “who have explicitly tied further interest rate rises to the strength of the labour market”.

One of the key reasons for the central bank choosing to put up interest rates once more in late June, was the service sector’s underlying price pressures.

It is clear, however, that significant upward pressure on wages is persisting across the UK – as shown by developments like junior doctors announcing that they would strike for five consecutive days from 7am on 13th July.

The FT also pointed to evidence of surprisingly resilient consumer demand in the face of price rises. Retail sales went up by 0.3% between April and May, which was significantly higher than the 0.2% decline that economists questioned by Reuters had forecast.

Such a figure comes despite shoppers having clearly been hit by a monster rise in consumer goods prices; they bought 0.8% fewer goods during May, but still spent 17% more in that period than in February 2020.

The BoE’s hope is that by driving up the cost of borrowing, it can reduce the spending power of consumers. This, in theory, would render shoppers unable to buy goods or services, or at least cause them to refuse to pay higher prices – thereby helping to dampen inflation.

The above data, though, indicates that the bank’s actions in this regard have so far largely failed to achieve such an effect.

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