Costs are rising at record rates in the UK’s service industries, including retail, leading to uncertainty about customer demand – and holding back plans for investment, the latest data from the CBI suggests. As costs rise, selling prices are also growing fast.
In the three months to August, both cost pressures and average selling prices saw “record rates of growth”, according to the latest CBI Service Sector Survey. That, says the CBI, has led to a sharp deterioration in sentiment about the general business situation for both businesses and professional services.
It questioned 199 services firms between July 26 and August 15 and found that cost pressures seem to have affected profitability, while plans for investment have fallen in the face of uncertainty around the level of future demand and sales.
That said, headcount was unchanged in the consumer services firms that took part in the survey while employment in business and professional services grew at a slightly slower pace than in the previous quarter, the three months to May.
Charlotte Dendy, head of economic surveys at the CBI, says: “There are slim pickings for those looking for positive signals in the services sector over the last quarter. Just as rising inflation is hurting households and every business sector, the services industry is no different.
“Average selling prices grew at a record pace and profitability in the sector fell once more, with uncertainty over demand the main reason why investment intentions deteriorated. Nevertheless, business AND professional services fared somewhat better than consumer services, with employment continuing to grow, as well as investment in training and IT.
“Come September 5, business will be looking to the next Prime Minister to move swiftly and effectively to help shore up confidence. That means supporting vulnerable households and businesses with high energy prices and setting out plans to get the UK economy back on a growth trajectory.”
In particular, the study found optimism among consumer services companies had fallen at the fastest rate (-64%) than since May 2020 (-86%), with business volumes down (-37%) for the first time in more than a year, although the pace of decline is expected to ease next quarter (-29%).
Costs in the three months to August (+88%) grew at the fastest rate on record among consumer services businesses, while average selling prices (+52%) grew at the fastest rate since May 2006 and expect to rise higher (+56%) over the next three months.
At the same time, profitability fell (-64%) at the sharpest rate in two years, and is expected to fall further next month (-84%). Employment came to a standstill (0%) and is expected to fall over the coming three months (-5%).
Consumer services businesses expect to cut back most significantly on spending on vehicles, plant and machinery (-31%, the weakest since November 2020) and on IT (-16% – to the weakest since August 2020) amid high levels of uncertainty about demand and sales (65%).
In business and professional services, sentiment also showed the strongest decline (-39%) since May 2020 (-79%), while cost pressures (+69%) were at record rates, as were average selling prices (+31%). Next quarter, price growth is expected to remain at similar levels (+30%). Uncertainty about demand (55%) is impacting on investment, although this is set to fall relatively slowly on land and buildings (-2%) and vehicles, plant and machinery (-3%) and grow, albeit more slowly than previously, in areas including training (+27%) and IT (+18%).