Service sector slows

Higher costs are being passed onto customers

The growth in UK service industries slowed slightly last month, but prices charged to customers hit new highs, according to a new report.

Figures from the Chartered Institute of Purchasing and Supply (CIPS) show that while the growth of business activity slowed in May, the sector was still in a healthy condition.

An index figure above 50 indicates expansion, and the purchasing managers' survey found reported seasonally adjusted business activity at 59.2 points in May against 59.5 in April.

The sector hit a near three-year high of 59.6 in March.

Employment slows

Employment levels were also slower than in April, but incoming new business and prices grew faster in May than in April.

The rate of growth was strongest across all sectors of the service industry, except in the IT sector.

Growth in the IT sector has eased following a burst in demand at the beginning of the year as millenium bug fears subsided.

But the report showed that companies were suffering from rising costs as skills shortages resulted in higher salaries.

However, companies managed to pass their higher costs onto customers as a results of strong demand for products.

The higher rate of inflation contrasts with the situation in the manufacturing sector, where strong competition from imports has held down prices signficantly.

Inflation fears

Both higher costs and prices may cause some concern for the Bank of England when it meets on Wednesday because they could spark higher inflation.

"I think the most worrying trend at the moment is the inflationary aspect. The input prices the service sector is having to put up with are very vigourous and very strong," said Roy Ayliffe of the CIPS.

But economists said the figures were unlikely to result in an interest rate rise.

"Both of the indicators on activity and prices are disappointingly firm," said Philip Shaw, economist at Investec. "Nevertheless, it is unlikely to sway the MPC's mind this week and rates are still likely to remain on hold."

The CIPS survey is based on data from a poll of purchasing and business executives at 500 private sector companies.