UK service sector slows as wage growth keeps prices inflated

The UK service sector grew at its slowest rates since March amid a softer rise in new orders while rising wage costs limited an easing in pricing pressures.

The S&P Global/CIPS UK Services purchasing managers’ index remained in growth for a fifth straight month at 53.7 in June, but down from 55.2 in May.

The figure was in line with City expectations and unchanged from a ‘flash’ estimate.

Staffing levels expanded at the fastest pace since last September as improving candidate availability helped to boost recruitment but service providers recorded another sharp increase in their average cost burdens.

Rising salary payments offset falling energy and transportation bills, the report said.

Nonetheless, the overall rate of inflation eased for the first time in three months and was the slowest since May 2021.

Tim Moore, economics director at S&P Global Market Intelligence, said: “The service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand.”

“Business activity increased at the slowest pace for three months, while the rate of new order growth eased further from April’s recent peak.”

Samuel Tombs at Pantheon Macroeconomics said: “The composite PMI is consistent with quarter-on-quarter growth in GDP in Q2 of about 0.3%, though we think a slightly weaker outturn is more likely, given that the composite PMI excludes the struggling construction and public sectors.”

He felt the drop in the output prices balance to 59.8 in June, from 60.5 in May, modestly eases the pressure on the MPC to raise Bank Rate by a further 50bp next month.

But he thinks the MPC “will need to see price rises slow over a period of at least a few months before it is willing to call time on its hiking cycle.”

He expects the BoE to lift rates by 25bp in August and September, before “standing pat in November.”