Costs and prices grow at record levels - Service Sector Survey

Last quarter, cost and average selling prices kept growing rapidly with strong growth expected to continue in the next three months, hitting some of the highest expectations on record for the sector as a whole, but particularly for business & professional services.

Though businesses remain optimistic about the general business situation, volumes growth eased in consumer services and stalled in business & professional services. This, alongside the rising costs and prices fed through to falling profitability across the service sector.

That’s according to the latest CBI Service Sector Survey, based on responses from 140 services firms. The survey was conducted between 28 January and 15 February.

Charlotte Dendy, CBI Head of Economic Surveys, said:

“Rising inflation and cost pressures are hitting firms’ profitability and their bottom line. The spectre of further price increases is being felt across the board.

“Despite this, businesses are looking to invest and employ more workers as the economy stays open for business. But weaker volumes growth and falling profitability threatens businesses’ good intentions.

“The Chancellor must use his Spring Statement to set us on a path to higher economic growth, starting with a permanent Investment Deduction which could lift business investment by £40bn by 2026.”

Business & professional services

• Business volumes were unchanged following three quarters of strong growth (+3% from +40%) but are expected to return to growth next quarter (+22%).
• Costs grew rapidly at a survey record pace (+62% from +56%) in the three months to February, with expectations the highest on record for next quarter (+74%)
• Average selling prices also continued to grow at the fastest rate on record (+20% from +17%), and businesses anticipate record price expectations next quarter (+26%).
• Profitability dropped in the quarter to February, after three quarters of solid growth (-19% from +20%), with a continued fall expected next quarter (-13%).
• Employment continued to grow at an above average pace (+23%), with growth set to accelerate next quarter.
• Plans for spending on vehicles, plant and machinery are the strongest on record (+20%), with investment on IT also set to increase (+22%). Spending is set to be cut back on land and buildings (-12%).

Consumer services

• Business volumes continued to grow, albeit at a slower pace than last quarter (+10% from +28%) with expectations for growth to accelerate over the next three months (+24%).
• Costs continued to see strong growth (+65% from +78%) with the pace expected to pick up next quarter (+75%).
• Heightened costs fed through to the strongest growth in selling prices since May 2007 (+42% from +20%) with this growth expected to pick-up next quarter (+52%, strongest expectations since February 2007).
• Stronger cost pressures also weighed on profitability (-11% from +14%) and this decline is expected to continue next quarter (-15%)
• Investment intentions are the strongest on record for IT (+53%) and for vehicles, plant and machinery (+36%), whilst spending on land and buildings is also set to increase (+22%) at the fastest rate since February 2016.