UK companies see cost pressures spreading at record pace, PMI shows

UK companies see cost pressures spreading at record pace

Rising Inflation and Economic Impact in the UK

By Andy Bruce

MANCHESTER, England, April 23 (Reuters) - Inflation indicators from British companies flashed red in two long-running business surveys published on Thursday, which showed record increases in price gauges, suggesting the impact from the Iran war is spreading across the economy.

Record Increases in Price Gauges

S&P Global's preliminary UK Composite PMI for April - covering services and manufacturing companies - showed the biggest rise in its input prices index from one month to the next since records began 28 years ago, hitting its highest level since a period of double-digit inflation in late 2022.

A separate indicator of price expectations just among manufacturers published by the Confederation of British Industry showed the biggest month-to-month increase since records started in 1975, jumping to the highest level in over three years.

Government and Market Reactions

British government borrowing costs hit their highest level so far in April shortly after the PMI was published. It will add to worries at the Bank of England that a leap in energy prices could ignite broader inflation expectations.

Investors on Thursday were fully pricing in two BoE rate hikes this year with the possibility of a third, doubling their bets from earlier in the week.

Investors view Britain's economy as particularly vulnerable to the jump in energy prices caused by the war.

Expert Commentary on Inflation Pressures

J.P. Morgan economist Allan Monks said he was surprised by the strength of service sector price pressures, which appeared to challenge BoE Governor Andrew Bailey's view that companies had limited pricing power due to the weak jobs market.

"The MPC has paid particular attention to the PMI pricing components at times over the past couple of years," Monks said. "Their strength amid resilience in activity to date suggests the inflation shock should be the more pressing immediate concern for the BoE."

The central bank is expected to keep rates on hold next Thursday as it awaits clearer signs of whether the increase in energy prices caused by the war will feed into broader price problems for Britain, where inflation has been higher than in other Group of Seven economies for much of the past four years.

Front-Loading Activity Boosts PMI Readings

FRONT-LOADING ACTIVITY BOOSTS PMI READINGS

The headline reading of the composite PMI, a monthly gauge of activity in Britain's manufacturing and services sectors, rose to 52.0 in April from 50.3 in March, above all forecasts in a Reuters poll of economists that pointed to a reading of 49.9.

But some of that strength probably reflected manufacturers bringing production forward to avoid any future problems in supply chains.

Business Confidence and Official Data

The CBI's survey showed confidence among British manufacturers fell to its lowest since the COVID-19 pandemic.

"Warning signs are flashing in this survey," Ben Jones, the CBI's senior lead economist, said.

Thursday's readings echoed official data this week showing the second-biggest month-on-month increase in factory input costs in March since records began in 1984, alongside a jump in headline consumer price inflation as fuel prices rose.

Outlook for Inflation and Economic Growth

Chris Williamson, chief business economist at S&P Global, said the PMI survey suggested inflation could rise more than many forecasters have predicted.

While the composite PMI pointed to quarterly economic growth of around 0.2%, details of the survey suggested that kind of pace could not be sustained without a resolution of the crisis in the Middle East, Williamson said.

The factory PMI input prices gauge rose to its highest level since June 2022 and has increased by more than 25 points over the last two months - the biggest such increase since the survey started in 1992.

(Graphics by Andy Bruce; Editing by Joe Bavier)