August's flash S&P Global/CIPS survey showed cost and price pressures, while still elevated, have continued to cool. Meanwhile, the composite PMI fell to a level usually consistent with monetary policy being loosened.
But with energy futures continuing to rise, and the Bank of England’s Monetary Policy Committee focused on the risk of high inflation becoming embedded in the economy, today's results are unlikely to provoke a change of direction from the MPC just yet.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The August flash S&P Global/CIPS survey reported a further fall in the composite PMI to 50.9, an 18-month low. Surprisingly, a reduction in manufacturing output was the main reason for the fall in the composite measure, with services activity only declining slightly. Survey respondents reported the weakest pace of new orders growth in 18 months, with the manufacturing sector again performing particularly poorly. More encouragingly, there was a further softening in cost and price pressures, although the latter development was partly a reflection of weak demand compromising the pricing power of firms.
“The PMIs have been poor predictors of GDP since the pandemic began, and distortions to the official output series caused by the end of free Covid testing and changes to the patterns of bank holidays in Q2 mean that this survey is unlikely to provide a good steer on growth in Q3 either. With Q3 having a full quota of working days, GDP should rise modestly, bucking the weakening trend from the survey.
“But the PMIs do provide a good demonstration of the degree to which monetary policymaking has moved towards targeting specific risks, particularly the risk of high inflation becoming embedded in the economy. Based on past form, August's composite PMI would be consistent with loosening monetary policy, not increasing the pace of rate increases. But the EY ITEM Club believes that it's unlikely that today's results will weaken the MPC's desire to continue increasing rates, particularly given that the further increase in energy futures prices over the past couple of weeks could mean an even higher peak for inflation than the MPC forecast at the start of the month.”