The United Kingdom’s economy unexpectedly regained momentum in October. According to a survey on Friday, cost pressures increased by the most in more than 25 years which could encourage the Bank of England to raise interest rates for the first time since the COVID pandemic.
Remarkably, the preliminary flash IHS Markit/CIPS flash Composite Purchasing Managers’ Index surged by the largest amount since May to hit 56.8 from September’s 54.9. In comparison, a Reuters poll of economists had pointed to a further slowdown to 54.0.
According to IHS Markit’s chief business economist, Chris Williamson, Britain’s economy picked up speed again in October. Still, Williamson said the expansion becomes dependent on the service sector. It in turn looks prone to a slowdown amid the recent increase in COVID-19 infections.
Britain’s services companies supported the surge in the PMI as consumers and businesses picked up their spending. It’s essential to note that travel companies benefited from a relaxation of COVID-19 travel rules.
Additionally, service sector activity outpaced manufacturing output by the widest margin since 2009. Remarkably, factories struggled again with shortages of supplies and staff and registered barely any growth.
A surge in overall employment was near August’s record high, despite problems in filling vacancies.
The BOE Should Raise Borrowing Costs Soon
Higher wages and the intensifying supply shortages resulted in the fastest rise in average costs since January 1998. Meanwhile, separate PMIs for the services and manufacturing sectors revealed that prices charged by firms increased the most since these series started in 1996 and 1992.
Inflation is set to hit more than double its 2% target soon. The Bank of England is anticipated to raise borrowing costs soon. The bank tries to ensure that increasing inflation anticipations do not become embedded in British businesses’ pricing decisions.
On Thursday, the Confederation of British Industry announced that manufacturers were raising prices by the most since 1980 due to some of the biggest gains in costs and labour shortages since the 1970s.
The PMI for the services sector increased to 58.0, its highest in three months. The manufacturing PMI’s output component fell to its lowest since February at 50.6.
Despite the improved picture for most firms, many consumers are concerned about the outlook for the economy as prices and COVID infections increase.
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