Fresh data from the UK services sector points to resilient growth but surging inflation pressures that suggest that the Bank of England may be more likely to raise interest rates before long.
The Bank's monetary policy committee (MPC) will have been watching closely after the April S&P Global/CIPS composite purchasing managers' index (PMI) rose to 52.6 in April from 50.3 in March, signalling continued expansion for the economy.
This was driven by the services PMI climbing to 52.7 in April from 50.5 in March, beating expectations.
However, firms reported a sharp increase in prices charged, driven in part by fuel surcharges linked to the conflict in Iran.
A measure of the services sector's inputs prices balance jumped its highest since mid-2022, leading to output prices being lifted to their highest since January 2023.
This is consistent with underlying services inflation accelerating to over 6.0% year-over-year, economists said, compared to the latest services CPI reading of 4.5% from the Office for National Statistics for March.
Economists said the combination of steady activity and rising prices shifts the focus for the monetary policy committee towards inflation risks.
Rob Wood at Pantheon Macroeconomics said the survey “provides more reason for the MPC to focus on surging prices rather than weakening activity” if services inflation is rising above 6%.
He noted that "rocketing prices" in the PMI survey suggested that inflation is accelerating more than in the benign Scenario A the MPC published last week, though survey may be overstating the inflation acceleration, judging by a smaller rise in the more reliable DMP price expectations.
Nevertheless, Pantheon expects the MPC to hike rates twice this year, followed by three cuts across 2027 and early 2028.
Thomas Pugh at RSM UK said the data shows the economy is “holding up well”, even as input costs surge, making further rate increases more likely if the trend persists.
“For the Bank of England, rising inflation indicators along with resilient output balances, if they are maintained over the next few months, makes future rate hikes more likely.
"Obviously, everything depends on how energy prices move going forward, but we still think the ultimate impact of the crisis will be a rising unemployment rate and weaker economic growth, which means any tightening cycle will be short and shallow.
"But clearly the risk of rate hikes is rising.”