Employers have warned that the driving force behind inflation is now higher wages, as companies pass along rising salaries costs to their clients.
According to S&P Global’s influential purchasing managers index (PMI), the economy is in a sharp slowdown, with the manufacturing industry shrinking and dominant service industries losing steam.
The monthly survey revealed that while prices are slower than last year, they remain “robust”. Inflation is now “largely due” to higher wages in the service sector rather than energy price spikes and pandemic disruptions which initially drove up costs.
The Bank of England officials will be concerned by the findings, as they are worried about the inflation embedding itself in the economy via a spiral of wage-price.
George Moran is an economist with Nomura. He said that the Bank of England was particularly concerned about the risk of a wage-price cycle and inflation via expectations. This is why we think that the Bank of England has a long way to go before it can raise rates.
The Bank has increased rates so far from 0.1pc to 5pc.
The financial markets expect another rise to 5.25pc in the next month. Rates will peak at 5.75pc before the end of the calendar year.
The headline PMI fell from 52.8 in May to 50.7 in the month of July, which is the lowest performance since January. A score above 50 is considered to be a positive indicator of growth. This means that the economy has stagnated.
The growth in the service sector has slowed down to 51.5 while manufacturing is shrinking faster than ever before, at 46.5.
Chris Williamson said that the UK economy is “close to stalling”.
He said: “Rising rates of interest and higher costs of living seem to be increasing the burden on households. This dampens a post-pandemic recovery in leisure spending.
“Meanwhile manufacturers are cutting their production as a result of a severe decline in orders from both the domestic and international markets.”
The pound fell by a quarter percent against the dollar, to $1.282, as traders hoped a slowing economy would limit future rate increases. Meanwhile, the borrowing costs of the government also decreased.
The outlook for Britain is better than the eurozone, despite the fact that the PMI indicates a dark period in the economy.
The currency area PMI dropped further into contractionary terrain at 48.9 with France’s private sector contracting at its fastest pace since November 2020, and Germany experiencing its sharpest contraction in November last year.
Jens Eisenschmidt is an economist at Morgan Stanley. He said that he expects eurozone GDP to fall by 0.1pc during the third quarter, partly because of a “deep manufacturing recession” in Germany.
At its policy meeting this week, the European Central Bank will likely raise its headline rate of deposit to 3.75pc.
Tullia Bocco, economist with UniCredit said that this may be the last rate increase for the moment as the economy is weakening.
She said that the central bank would raise rates as planned this week, but the outcome of the meeting in September is becoming increasingly uncertain.
A forward-looking analysis indicates that there will be no further tightening after this week.
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