Press release

4 Aug 2021 London, GB

Services activity decelerates as inflation concerns grow – EY ITEM Club comments

Services activity decelerates as inflation concerns grow – EY ITEM Club comments

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Related topics Growth COVID-19
  • July’s services PMI offered further confirmation that the biggest gains from reopening the economy are now behind us. But activity continues to grow at a decent pace, and the EY ITEM Club expects another quarter of strong GDP growth in Q3.
  • The survey reported record highs for the balances for input costs and selling prices, suggesting inflation is likely to move higher in the second half of 2021. But the EY ITEM Club still thinks the pickup will prove transitory and expects the MPC to take a similar line.  

Martin Beck, senior economic advisor to the EY ITEM Club, says: 

“The services PMI fell to 59.6 in July, down from 62.4 in June, but still some way ahead of the long-term average of 54.5. The pace of activity growth has continued to slow, which is likely to reflect the notion that the biggest gains from reopening are now behind us. The PMI may also have been negatively affected by the rise in COVID-19 infections during July, which required growing numbers of people to self-isolate.

“The weaker reading for services pushed the composite PMI to a four-month low of 59.2. The EY ITEM Club remains wary of reading across from the PMIs to GDP, given their poor relationship during the pandemic, but the results are broadly consistent with the notion that Q3 is likely to see decent GDP growth, albeit a less heated pace than Q2.

“Arguably of greater interest than the activity data were the messages on costs and prices. July’s survey reported record growth in both costs and selling prices, with respondents attributing the rises to stronger wage inflation and rising costs of fuel and other raw materials. While the EY ITEM Club is cautious about these results, given the survey has tended to overstate price pressures in the past, inflation is likely to reach around 3.5% on the CPI measure in late 2021. But the EY ITEM Club remains confident that this rise will prove transitory and expects the majority of the MPC to take a similar view at tomorrow’s meeting.”