- February’s services PMI delivered good news on the economy’s emergence from the Omicron variant. An index of 60.5 was an eight-month high. But inflationary pressure in the services sector remained very elevated, representing a downbeat outlook.
- The burgeoning cost of living pressures could prompt stronger pay demands, adding to cost and price inflation.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“As far as signs of the recent performance of the services sector go, February’s services PMI was positive. An index of 60.5 represents a step up from 54.1 in January and pointed to the fastest rate of expansion since June 2021. Employment and export orders picked up in February, and growth in the latter was the joint-strongest since 2014. Overall, the sector seems to have emerged from Omicron-related disruption in good shape. February’s manufacturing PMI also rose, and the composite index increased to 59.9, an eight-month high.
“But, having navigated the latest coronavirus wave, the economy is now facing inflationary challenges. February’s IHS Markit/CIPS survey measure of input price inflation was the second strongest in the survey’s near-26-year history. And selling price inflation reached a fresh record high for the second month in succession. Given the rise in commodity prices over the last week, cost pressures are likely to get worse.
“While services companies are not as directly exposed to more expensive raw materials as manufacturers, accelerating inflation could prompt demands for bigger pay rises. However, if market forces mean that workers are compelled to accept real pay cuts, consumer demand will almost certainly be negatively affected. Granted, the current low unemployment and strength of households’ balance sheets mean consumer spending isn’t out of supports. But the near-term outlook for growth is dimming.”