UK services sector hit by sharpest cost surge since 2021

Businesses in the United Kingdom’s dominant services sector reported the sharpest month-on-month rise in input costs in nearly three years in March, as higher energy and transport prices intensified inflationary pressures linked to the Iran war.

The latest survey from S&P Global showed its UK Services Purchasing Managers’ Index (PMI), published on April 7, fell to 50.5 in March from 53.9 in February. The reading was lower than both the initial estimate of 51.2 and the preliminary reading of 51.0, marking the weakest level in 11 months. A PMI figure above 50 indicates expansion, while a reading below 50 signals contraction, Reuters reports.

At the same time, cost pressures accelerated sharply. S&P Global’s gauge of input prices paid by British services firms rose to 68.4 in March from 63.1 in February — the largest month-to-month increase since a February-to-March surge in 2021 and the highest level in nearly a year.

Manufacturers had already reported the steepest monthly increase in input costs since October 1992, underscoring broader inflation risks across the economy.

Around 40% of respondents in the services survey reported higher input costs in March. Tim Moore, economics director at S&P Global Market Intelligence, said many companies cited suppliers passing on higher prices for energy, raw materials and shipping.

The survey’s measure of prices charged by services firms also climbed, rising to 58.5 in March from 55.2 in February.

Andrew Bailey, Governor of the Bank of England, told Reuters last week that firms had limited pricing power to pass on cost increases, although some pass-through of higher energy costs was likely.

Demand conditions weakened during the month.

"UK service providers experienced a marked slowdown in output growth in March as the war in the Middle East encouraged greater risk aversion among clients and postponed investment decisions," Moore said.

The services PMI measure of new export business dropped to 46.3 from 50.3, the fastest pace of decline in 11 months and below the 50 threshold for the first time since last November, when uncertainty ahead of finance minister Rachel Reeves’ budget weighed on business sentiment.

Companies also reported the largest drop in new orders since July, though they reduced staffing at the slowest pace in four months.

Overall optimism fell to its weakest level since June last year, with firms citing concerns about the duration of the Iran war and its potential impact on inflation, supply chains and borrowing costs.

By Sabina Mammadli