Financial market expectations for another interest rate cut next month have risen after a closely-watched survey indicated further progress ahead in the battle against stubborn services inflation.
Input cost inflation eased to its lowest for just over three-and-a-half years in August, according to preliminary data from the S&P Global Composite Purchasing Managers’ Index (PMI).
“This was mainly driven by a renewed slowdown in cost pressures across the service sector amid reports of fewer supplier surcharges and more competitive market conditions”, the report noted.
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It is an important early indicator for Bank of England policymakers who have highlighted concerns about price growth within services as a major stumbling block to interest rate cuts.
The other major worry has been the pace of wage growth.
The PMI report did highlight little change in the rate of salary increases.
The input cost data raised expectations of a second consecutive interest rate cut by the Bank – by two percentage points.
London Stock Exchange Group data showed almost 30% of participants expected a reduction to 4.75% at the September meeting.
The authors of the report said wider findings showed the economic momentum of 2024 was set to continue but at a reduced rate than that seen over the first two quarters.
The so-called flash estimate, in which a reading above 50 indicates growth, rose in August to 53.4 from 52.8 the pervious month.
Both the manufacturing and service sectors reported output growth and new jobs amid a more optimistic business environment than earlier this year.
Survey respondents said more upbeat assessments of the domestic economic outlook of late had spurred efforts to boost business capacity.
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‘We face big challenges in the economy’
S&P Global said the figures were consistent with the economy expanding at a quarterly rate of 0.3%.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “August is witnessing a welcome combination of stronger economic growth, improved job creation and lower inflation, according to provisional PMI survey data.”
“The latest survey data therefore help lower the bar for further interest rate cuts, although the still-elevated nature
of inflation in the service sector suggests that policymakers will move cautiously,” he added.
A Reuters poll of economists published on Wednesday suggested the Bank of England will cut interest rates just once
more this year, in November.
Services inflation is one of the stumbling blocks.
While the main measure of inflation rose last month, largely down to the way energy prices are calculated, downwards pressure came from services inflation.
The annual rate slowed to 5.2% from 5.7%. It means prices are still rising – and fairly sharply – but just not by as much.
The PMI data is strong evidence that further progress is likely to be reflected in official figures ahead.