Businesses across Britain’s services sector recorded a pronounced rise in costs in March, with input-price pressures hitting their steepest monthly increase since 2021, S&P Global’s latest survey showed. At the same time, the pace of activity in the sector cooled markedly, reflecting weaker demand linked by firms to geopolitical uncertainty in the Middle East.
The S&P Global Purchasing Managers’ Index (PMI) for services slipped to 50.5 in March from February’s 53.9 - a drop that was larger than the initially reported fall to 51.2 and represents the index’s weakest reading in 11 months. Incorporating last week’s softer manufacturing figures, the composite PMI was revised down to 50.3 from an initial 51.0.
S&P Global’s gauge of input prices paid by services companies rose to 68.4 in March, up from 63.1 in February. That month-on-month increase was the largest since the jump observed between February and March 2021. Manufacturing firms, according to the earlier release, had recorded their own substantial month-on-month rise in input costs - the largest since October 1992.
About 40% of respondents to the survey said their input costs increased during March. The survey highlighted higher spending on energy and transportation as key drivers of the rise in costs across the services sector.
"Many companies reported suppliers passing on higher prices paid for energy, raw materials and shipping," said Tim Moore, economics director at S&P Global Market Intelligence.
Service-sector firms also increased the prices they charge customers, with the PMI measure of prices charged rising to 58.5 in March from 55.2 in February. That upward movement in selling prices comes even as policymakers have been weighing how much of higher costs businesses can actually pass through to customers.
Bank of England Governor Andrew Bailey told Reuters last week that firms generally have limited pricing power to absorb and pass on cost increases, although he acknowledged that some pass-through of higher energy costs was likely.
Alongside mounting cost pressures, companies reported softer demand. S&P Global noted that service providers experienced a marked slowdown in output growth in March as the war in the Middle East prompted clients to adopt a more risk-averse stance and delay investment decisions.
The survey’s measure of new export business to services firms fell to 46.3 from 50.3, marking the fastest rate of decline in 11 months and moving below the 50 threshold that separates growth from contraction. This was the first sub-50 reading for new export business since last November, a period when businesses were affected by uncertainty ahead of finance minister Rachel Reeves’ budget.
Companies also recorded the largest drop in new orders since July. Staffing reductions continued but slowed, with firms cutting payrolls at the least rapid pace in four months. Overall optimism about the year-ahead outlook among services firms eased to its weakest level since June of last year, with respondents citing concerns about how long the Iran war might persist and the potential consequences for inflation, supply chains and borrowing costs.
Context and implications
The S&P Global data point to a combination of rising input costs and softening demand in the services sector. Firms are experiencing elevated cost pressures largely tied to energy, raw materials and transportation, while client risk aversion linked to the conflict in the Middle East is exerting downward pressure on new business and investment plans. The readings suggest firms face a squeeze between higher costs and limited ability to sustain expansion in activity.