UK services sector delivers surprise output increase

UK services activity spiked surprisingly in October, a closely followed survey revealed on Thursday, as the sector recorded the highest input prices in the report's history.

The Markit/CIPS UK services purchasing managers' index rose to 54.5 from 52.6 the month before, which was ahead of the consensus estimate of 52.4 and the fastest expansion since January.

Weakness in the pound since the Brexit vote has driven a "marked intensification of cost pressures" among services companies, Markit said, with input price inflation surging to the highest since March 2011 and with the month-on-month acceleration a record since the survey began 20 years ago.

However, the sector continued to generate more jobs, although at a weaker rate than the three-year average.

Following surveys from the manufacturing and construction sectors, the all-sector’ PMI for October rose to 54.6 from 53.8 in September.

"Further signs that the UK economy is gaining further growth momentum is marred by news that inflationary pressures are rising rapidly," said IHS Markit economist Chris Williamson.

"Growth of business activity picked up in October to its fastest since January with hiring also accelerating, but inflationary pressures also continued to build."

He said that given the faster growth of both business activity and prices, it was "hard to see how the Bank of England would consider any further stimulus appropriate at this stage".

Sam Tombs at Pantheon Macroeconomics said the pick-up in the services sector signals that the economy still is showing little adverse impact from the Brexit vote, "but the risk of a renewed relapse in growth, caused by rising inflation and corporate caution due to hard Brexit risks, remains high".

While Tombs was encouraged by increases in the new orders and future activity indices, the surge in input and output prices in the services sector meant he doubted that sector activity will continue to grow at recent solid rates.