Services sector output falls amid rising costs

Output in Britain's powerhouse services sector fell back further in February as it was stung by the steepest rise in costs for more than eight years as a result of the weak pound. 

The closely watched Markit/CIPS services purchasing managers' index (PMI) fell to 53.3 in February, down from 54.5 in January, and below economists' forecasts of 54.1.

A reading above 50 indicates growth.

The news took currency markets by surprise. The pound was down 0.3% against the US dollar at 1.222, and was lower by nearly 0.5% versus the euro at 1.161.

Higher business costs were the "main negative development" last month, according to the survey, which recorded the steepest increase in input costs since August 2008.

That led to the largest jump in service prices for almost eight-and-a-half years.

Chris Williamson, chief business economist at IHS Markit, said: "Exchange rate depreciation, rising energy costs and higher wage bills all had a profound impact on prices charged inflation, which was the highest since September 2008."

The pound has dropped more than 18% against the US dollar and 10% against the euro since the Brexit vote, increasing the cost of imports, and subsequently driving up business input costs.

Sterling's collapse has pushed inflation to a two-and-a-half-year high of 1.8%.

Some firms said they observed more "cautious spending" among consumers, but Mr Williamson said that did not stop businesses from bumping up prices tags in preparation for further cost pressures.

"This will have policymakers wondering whether consumers can continue spending as Brexit negotiations approach, or whether they rein back further in response to squeezed household budgets," he said.

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