Inflationary pressures hit record highs in June as UK businesses continued to rebound, according to a closely watched survey that showed commercial activity fell back only slightly after last month’s reopening from lockdown.
The IHS Markit/Cips interim composite purchasing managers’ index was 61.7 in June, down slightly from a record high of 62.9 on the final reading in May, and matching some of the highest readings since the survey began in 1998.
But while economists said the fallback suggested the reopening boom may have passed its peak, intensifying inflationary pressures highlighted the danger of prices rising rapidly as businesses expanded.
The measure of input cost inflation, which has risen for five consecutive months as reported by the survey, matched a record last seen in 2008, while the rate of output price inflation reached a record high for the second month in a row.
“Inflation worries have continued to intensify,” Chris Williamson, chief business economist at IHS Markit, said.
“Record levels of the survey’s price gauges and the further development of capacity constraints hint strongly that consumer price inflation has much further to rise after already breaching the Bank of England’s 2 per cent target in May.”
The PMI data, which was collected from June 11-21, is a weighted measure of responses from leaders in the services and manufacturing sectors. Any reading higher than 50 indicates a majority of respondents reported an increase in activity.
The reports of rising inflationary pressures comes after annual consumer price growth hit 2.1 per cent last month, unexpectedly surpassing the BoE target and sharpening fears that rapid post-lockdown expansion could be accompanied by sharp inflation.
The BoE, which holds a monetary policy meeting on Thursday, is under pressure to show it can keep inflation under control after it failed to foresee the rapid increase this spring. Andy Haldane, the bank’s chief economist, has warned against complacency over the danger of rising prices.
The PMI survey showed rapid growth in new orders this month, and job creation quickened to the strongest level in the series’s history as companies hired staff in response to rising demand. Respondents also expressed confidence output would increase over the next year.
However, optimism fell to its lowest level in five months, and respondents also reported labour shortages, driving higher wage costs. This adds to concerns the “recent spike in inflation could prove stickier”, Williamson said.
Rhys Herbert, senior economist at Lloyds Bank, said that while the data pointed to a “strong ongoing recovery” overall, worker shortages, supply chain disruption and rising cost pressures were “starting to hold back output”.
Samuel Tombs, chief UK economist at consultancy Pantheon Economics, said the “upbeat” PMI readings jarred with other evidence, such as the Office for National Statistics business survey, that pointed to a “sharper deceleration”.
“Markit’s survey often is more of a sentiment barometer than a precise gauge of business activity, we still think that month-to-month growth in gross domestic product probably slowed to about 1.5 per cent in May and 0.5 per cent in June,” he said.
Kieran Tompkins, assistant economist at consultancy Capital Economics, said the slight decline indicated “the pace of recovery may have peaked” from the surge seen immediately after lockdown was eased.
A fall in services activity, he said, was in particular a surprise given the survey was made in the month after indoor hospitality reopened. But he added the “lofty” measure suggested the sector was “still growing at a healthy pace”, suggesting GDP would return to pre-pandemic levels by August.