Service sector inflation shows dip in June

INFLATION in the booming service sector fell in June, according to figures published yesterday.

Services companies are finding it difficult to pass on higher costs to consumers while cheaper imports and lower interest rates are driving down input costs, the Chartered Institute of Purchasing and Supply (CIPS) said. Its overall index of activity in the services industry rose to 56.6 from 56.4 in May, where 50 is the dividing line between expansion and recession. The index of prices charged by services companies fell sharply from 51.2 to 50.4, just above the level that would indicate prices were falling.

Rises in input prices also fell, from 55.9 to 54.2, the lowest rate this year. One analyst said the sector might have achieved a "new paradigm" of growth with low inflation.

CIPS said: "Service providers were limited in their ability to pass higher costs on to their customers by rigorous competitive activity. Firms in the IT and computing and financial intermediation sectors actually reduced their charges during the month."

CIPS said the introduction of the European Working Time Directive had led to rising payrolls, but the upward effect on input prices was cancelled out by falling import prices. The index of new business rose steeply to 58.5 from 54.9 - its fastest rate of growth for 15 months.

CIPS said the increase was driven by the lower cost of borrowing and the recovery of the manufacturing sector.

Service sector firms remained optimistic in June with almost two-thirds of companies surveyed expecting activity levels to be higher in a year's time.

Members from all broad service sectors expected activity levels to rise following an improvement in economic conditions both at home and abroad.

Economist Dharshini David of HSBC said the figures contained "shades of new paradigm" - a reference to the current American phenomenon of high growth, low inflation and low unemployment.

"Although the outlook for output is strengthening, there are tentative signs of an easing in inflationary pressures," he said. "If this feeds through to the hard inflation data, then any tightening of monetary policy next year is likely to be modest."

Richard Iley of ABN Amro said: "This adds to the growing body of evidence that low interest rates are inducing a healthy recovery in the economy."

Analysts said the data would have little influence on the Bank of England's Monetary Policy Committee meeting to discuss interest rates tomorrow and Thursday. Most expected the MPC would keep rates on hold at 5 per cent.

"The CIPS survey doesn't change the picture, which is very much one of recovering activity but muted price pressures," said Mark Wall, economist at Deutsche Bank.