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Sunday, May 22, 2022

Omicron variant and rising prices combine to cool activity in UK services sector

Omicron variant and rising prices combine to cool activity in UK services sector

The authors of a closely watched survey suggest the Bank of England would be justified in raising rates again this month as rising prices damage demand in the fragile economic recovery.

Business output took a hit this month from rising prices and restrictions to curb the spread of the Omicron COVID variant, according to a closely watched survey.

A flash reading of the IHS Markit/CIPS Composite Purchasing Managers Index (PMI), covering the dominant services sector and manufacturing, showed its measure of activity at an 11-month low in January.

The survey suggested pandemic-related rules damaged demand at consumer-facing companies while factory orders were growing at their weakest pace for a year.

Of the greatest concern for the Bank of England, which meets to set interest rates next week, will be that gauges of costs paid and prices charged by services companies increased in January - leaving them heading back towards all-time highs.

Chris Williamson, chief business economist at IHS Markit, said: "With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting."

Policymakers raised rates last month from their COVID crisis record low of 0.1% to 0.25% as the pace of price increases continued to accelerate - mainly driven by energy costs but also food prices and continued supply chain disruption.

The most recent figures showed the consumer prices index measure of inflation at its highest level for almost 30 years.

It is widely tipped to rocket ahead in the months to come - especially if a 50% increase in the energy price cap is imposed from April as industry experts predict, with businesses also set to face stiffer bills.

There was some good news contained within the PMI survey.

Supply chain delays and price pressures eased further for manufacturers last month and overall business confidence in the outlook picked up.

Mr Williamson added: "Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief.

"Many business and financial services companies have meanwhile been far less affected by Omicron, and saw business growth accelerate at the start of the year."

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