Families splashing cash despite high inflation and interest rates fuels services growth

Families splashing the cash despite high inflation and interest rates crimping their budgets is keeping Britain’s services economy motoring along, a closely watched survey out today shows.

S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) final purchasing managers’ index (PMI) for the services sector, which generates about £2 in every £3 in the UK, came in at 55.2 points in May.

That figure was down slightly from April’s 55.9 point reading, but up from an initial estimate of 55.1 points. It was also in line with the City’s expectations and far above the 50 point threshold that separates growth and contraction.

Decent demand for “staycations” and leisure activities kept the PMI aloft, while spending on technology services pumped growth.

Tim Moore, economics director at S&P Global Market Intelligence, said: “Service sector businesses have experienced strong growth so far in the second quarter of 2023, fuelled by resilient demand for consumer and technology services, combined with a post-pandemic tailwind as households switched from spending on goods to services.”

Today’s survey is yet another sign that households keep on spending despite being gripped by inflation staying at multi decade highs and the Bank of England hiking interest rates aggressively to tame price rises.

Prices have climbed 8.7 per cent over the last year, down from an increase of 10.1 per cent, though there are fears that inflation is proving much harder to tackle than first thought. Core inflation jumped to 6.8 per cent in April from 6.2 per cent, taking the Bank and City by surprise.

That has sparked bets on Bank Governor Andrew Bailey and the rest of the monetary policy committee sending borrowing costs to a peak of at least 5.25 per cent. They are currently 4.5 per cent after twelve successive hikes.

Demand in the UK economy is poised to eventually recede as homeowners have a big chunk of their budgets eaten up by higher mortgage bills after their current contracts end.

There are signs that inflationary pressures are still coming down the pipeline. 

“Higher salary payments more than offset lower fuel costs, which meant that overall input price inflation edged up to its strongest for three months in May,” Moore said.

But services firms have yet to pass on those wage increases properly. “The rate of inflation eased to its second lowest since August 2021,” the survey noted.