UK services sector hit by inflationary pressures as new orders decline

Highlights 

• Rate of price inflation accelerated at the fastest pace since the record began in 1996
• expanding fears of inflationary pressures also unnerved the business sentiments
• final reading of the IHS Markit/CIPS UK Services PMI came in at 55.4 in September.

The services sector of the United Kingdom continued to face the ongoing business challenges as the enterprises passed on the sharp increases in the cost of fuel, energy bills and maintenance of adequate staff to the consumers, as per the survey conducted by IHS Markit.

According to the survey manager, the rate of price inflation accelerated at the fastest pace since the record began in 1996 after the sharp increase between August and September of 2021. The enterprises operating within the services sector struggled with various facets including the acute supply chain constraints, as a result of which the reporting months saw the slowest increase in the volume of new orders since the third national lockdown.

The expanding fears of inflationary pressures also unnerved the business sentiments with the companies passing on the additional costs to consumers, effectively making the services less affordable. Given the persisting hardships and the tightened operating environment, the services sector growth can further depreciate in the current month as the government-backed furlough scheme has ended in September.

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According to the data compiled by IHS Markit/CIPS, the final reading of the UK Services PMI came in at 55.4 in September following an upward revision from the preliminary estimate of 54.6. The rate of improvement in the UK services sector remained marginal on a sequential basis as the final reading for Services PMI stood at a six-month low of 55.0 in August 2021. However, there was a “solid increase in overall business activity”, while the rate of expansion was categorically weaker as compared to the peak of 62.9 registered in May, this year.

September has been the fourth straight month when the new order growth dropped as a result of malfunctioned supply chain systems, termination of stamp duty break and the industry-wide limitedness of staff. With the slowest increase in the new business volumes, the order books returned to expansion levels in March of 2021.

The present month will be a make or break for the services industry before the commencement of holiday season and the flurry of deals and discounts as the businesses, alongside the government, are deploying extensive resources to get back in a position to serve increased demand from consumers in the terminal quarter.

As many as 34% of the respondents on the survey panel reported an increase in the output, whereas 13% indicated a reduction in the month of September. The enterprises reporting a fall in business activity largely reflected the ongoing challenges in the hospitality sector as delays due to supply chain disruptions, unavailability of hauliers, as well as HGV drivers and shortage of workforce impacted the operations.

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On the contrary, the higher levels of business activity was primarily realised due to robust confidence amidst the clientele and apparently favourable operative environment due to the withdrawal social distancing guidelines and other pandemic-induced restrictions. Businesses struggling fill the vacant positions due the widespread shortage of skilled labour, coupled with the “persistenely high number” of departing worker partly halted the employment growth in September.

The pace of job creation slipped from August’s record high as the benefits under furlough scheme ended which forced the enterprises with inadequate revenue streams to cut back on cumulative employee benefit expenses. The backlog of work across the services sector was again disturbed by the extended waiting times for supplier deliveries, while staff inadequacy furthered the pain for the industry.

As per the latest data showcased by the survey, the quantum of unfinished business marked the longest phase of backlog accumulation since 2015. The mounting supply chain hurdles are increasingly hurting the businesses as corporations witnessed “another round of steep input price inflation” during September of 2021. The aftereffects of price charged inflation led to a considerable increase in the number of service providers reporting a surge in the average prices jumped to 24% in September from 17% in August.

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With the gradual recovery in consumer demand, the enterprises of the services sector have noted that the rising salary payments due to insufficiency of staff, expanding challenges in the supply chain & logistics space and the subsequently higher transport costs collectively pushed up the inflationary pressures.

Only 1% of the enterprises indicated a reduction in average cost burdens, while half of the survey panel reported an increase, cumulatively steering to the second-fastest rate of cost inflation since the onset of survey. With the persisting set of challenges in the services industry, about 57% of the panel members are expecting a rise in output in the current year, given the heightened demand from consumers during the upcoming holiday season. On the other hand, 8% of the panelists are anticipating a fall in output in 2021 as business optimism partly eased in September as compared to August levels.