Suppliers pass on costs amid record services growth

3 June 2021

A fifth of service providers increased their prices charged in May due to cost pressures and a rebound in client demand, according to the latest PMI.

The UK services sector gained further momentum in May, with growth driven by revived business and consumer spending as pandemic restrictions loosened. 

The IHS Markit/CIPS UK Services Purchasing Managers’ Index reached 62.9 in May, up from 61.0 in April. The latest reading was the fastest rate of output growth for 24 years.

Service providers reported the strongest rate of employment growth for just over six years but backlogs of work continued to accumulate due to forward bookings, pressure on business capacity and staff shortages.

Tighter labour market conditions and subsequent rises in salary payments added to cost pressures across the sector, which led to the steepest overall rate of input price inflation since July 2008. 

In addition to wage pressures, service providers reported that suppliers had passed on higher raw material and transportation costs during the latest survey period.

Around 20% of the survey panel reported an increase in their average prices charged in May. Higher charges were overwhelmingly linked to cost pressures and a sharp rebound in client demand.

Duncan Brock, group director at CIPS, said: “Businesses rushed to increase their operational capacity to meet this demand but were struggling to fill their job vacancies. As staff moved on to other opportunities following the pandemic’s impact on lives and priorities, a potential skills gap in the sector means some firms may struggle to meet their new goals.

"This shortfall in talent meant the best candidates were increasingly in demand and demanding higher wages, adding to the highest inflationary rise in business costs since July 2008. We will see more pressure for salary rises, as basic living becomes more expensive for everyone as the hike in prices charged by service companies was the highest since 1996."

Tim Moore, economics director at IHS Markit, said: “Pressure on business capacity due to a spike in demand and staff hiring difficulties emerged as a major challenge for service sector companies in May. Job creation was the strongest for over six years, but backlogs of work accumulated to the greatest extent since the summer of 2014.

"The successful vaccine roll out has generated a strong willingness to spend and fortified business optimism across the service economy. However, inflationary trends intensified in May as suppliers passed on higher transport bills, staff costs and raw material prices. Imbalanced demand and supply appears to have spread beyond the manufacturing sector, which contributed to the steepest rise in prices charged by service providers since the survey began in July 1996."

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