The UK’s latest Purchasing Managers’ Index (PMI) has been the latest to show a drop-off in the composite services index. It dropped from 52.8 in June to 51.2 in July. This notable decrease signals difficulties ahead for the Bank of England as it prepares for its next few monetary policy decisions. This fits with the Bank’s own “decision maker” survey, showing a significantly more cautious outlook from the private sector.
Over the course of the year, private sector pay growth is expected to move up quite close to four percent. Wage growth like this could have major consequences for inflation and the economy at large. In August, the Bank of England is set to face an especially perilous decision-making environment. That would create the strange opportunity for a three-way vote split—a strange déjà vu from the May situation.
We forecast inflation in the services sector to continue reducing through the back half of the year. Some big annual increases announced in April could push overall inflation above 6% until late next spring. Even the Bank of England found out just recently that inflation pressures haven’t gone away. On service-related costs, there is a glimmer of hope for slow, steady improvement.
In May, the Bank of England voted by a razor-thin four to three majority to cut rates by 25 basis points. The decision revealed just how divided top officials are on the issue. Two were opposed to any change, but the other two wanted to go for a daring 50 basis point cut. The Bank has been beaten down by high inflation and choppy, but potentially cooling, boss worker data. As such, the odds of more rate cuts in August and November remain on the table.
In the UK, payroll taxes just went up, at the same time as the National Living Wage was increased. These shifts are exacerbating the challenges to hiring practices across industries. Meanwhile staffing costs are under extreme pressure, hospitality’s “perfect storm.” This impact is most apparent as the industry goes through repeated spring inflationary pressures. Meanwhile, official payroll figures continue to paint a picture of retreat this year, adding urgency and concern to the picture of deteriorating employment prospects.
Even with these pressures, the bar for going to more aggressive rate cuts is still high. A continued run of troubling jobs data over the summer could prompt a reevaluation of the Bank of England’s strategy. State officials will be watching economic indicators like hawks. They will consider how to use their interest rate adjustment powers as the market develops and conditions change.