The cost of living squeeze that is already threatening to cool growth is tightening, driven by UK businesses lifting prices at the fastest pace on record to cope with a cost storm, a closely watched survey released today reveals.
A combination of soaring staff costs, swelling energy bills and higher raw material prices has coaxed UK services firms into hiking prices at the fastest pace since records began in 1996, according to the latest purchasing managers’ index (PMI) from S&P Global.
Activity remains strong in the services economy, with the PMI registering a reading of 62.6 in March, up for the third month in a row and the second strongest on record.
A reading above 50 indicates a majority of firms reported growth.
Oil and gas prices have been propelled by Russia’s brutal invasion of Ukraine as a result of stoking fears over the security of energy supplies.
Oil prices briefly hit $139 a barrel, its highest level since 2008, while UK gas futures have breached record highs, raising businesses’ operating costs.
Higher grain and fertiliser costs as a result of supplies being choked from Ukraine and Russia have made it more expensive to produce basic foods, prompting economists to warn food prices will climb in the coming months, hitting poorer households.
Experts warned that more price hikes are to come.
“Many survey respondents commented that the full extent of the recent spike in their operating costs had yet to be passed on to customers,” Tim Moore, economics director at S&P Global, said.
The fresh survey underlines the severity of inflationary pressures building in the UK that may stop the country from casting aside years of economic underperformance.
Input costs rose at the second-quickest pace ever, S&P Global said.
Persistent wage pressures emanating from the jobs market has been the top risk identified by the Bank of England to elevated inflation being embedded in the UK economy over the long-run.
Soaring wages without matching productivity gains can lead to a so-called wage/price spiral, in which workers demand higher pay to offset inflation, prompting firms to hike prices in response to rising costs.
Inflation is already running at a 30-year high of 6.2 per cent, but is expected to surge much higher, peaking at around nine per cent and averaging more than seven per cent over the course of the entire year.
Living standards are forecasted to erode at the steepest rate since 1956, according to the Office for Budget Responsibility (OBR), prompting a spending pull back driven by households having less financial resources to maintain purchases.
The projected spending crunch prompted the OBR to slash this year’s growth forecasts to 3.8 per cent from six per cent.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Businesses are starting to worry about how resilient demand will be as households’ real disposable income declines.”
Concerns over the economic outlook and the spillover effects of the Russia-Ukraine war pushed business confidence down to its lowest level in nearly a year and a half.