The dominant term in the UK economy is its service sector. For this reason, the latest Markit/CIPS Purchasing Managers’ Index (PMI) reading is always carefully scrutinised. At the moment, the service sector is able to access the EU single market without restriction; this could well change after Brexit.
The most recent reading for PMI in the service sector came in at 53.6 (any reading above 50 indicates that the sector under study is expanding). The reading indicates an increased rate of growth over the August reading of 53.2. The August reading was the weakest expansion rate seen for eleven months, so the September data is a relief.
The performance of the UK’s service sector lags behind comparable data for the Eurozone (as a whole) where the sector recorded a value of 55.8. Given that the UK economy is the second/third largest in the EU behind Germany (and France on some readings), this is troubling.
The Markit service sector report makes the same comment about rising prices as it did for the construction sector, noting that rising prices hit their highest levels since April for the service sector. This price inflation in a critical sector of the economy may make a Bank of England rate rise at next month’s meeting more likely. Financial analysts expect that the Bank will raise rates in the next few months, probably by 0.25 basis points – this factor led to recent gains in the exchange rate for Sterling.
Mitigating against a rise in interest rates is the fact that even slightly more expensive borrowing costs might have a dragging effect on the UK economy. Any interest rate rise will be passed on to business and consumers alike by (larger) increases in business and personal loans, overdrafts and mortgages.
Inflation in the UK is well above the BoE target level of 2%, currently standing at 2.9% on the Consumer Price Index reading.