UK business activity cools as inflation pressure ramps up, PMI shows

By Andy Bruce

Sept 23 (Reuters) - Growth in British business activity cooled this month and inflation pressure built, a survey showed on Wednesday, an awkward backdrop for finance minister John Healey ahead of his first budget next month.

The S&P Global UK Services Purchasing Managers' Index (PMI) fell in September to 51.7 from 52.5 in August, a three-month low, according to "flash" or preliminary data. A Reuters poll of economists had pointed to a reading of 52.0.

Prices charged by services companies, the backbone of Britain's economy, rose at the fastest pace in four months. They also reported accelerating cost pressures following a rise in energy prices stemming from the escalating war in Iran.

Data company S&P Global said its survey pointed to quarterly economic growth of around 0.1%, compared with 0.4% in the second quarter.

Healey has been trying to strike an upbeat tone over Britain's economic prospects after a run of surprisingly strong business and consumer data since Prime Minister Andy Burnham took power in July.

But economists say soaring government borrowing costs and rising inflation pressure threaten to cloud the outlook.

"September is seeing a worrying combination of disappointingly sluggish economic growth and intensifying inflationary pressures, with subdued business confidence and high costs meanwhile continuing to discourage hiring," said S&P Global's chief business economist, Chris Williamson.

"While the upturn in the survey's price gauges suggest the Bank of England looks likely to keep a hawkish bias, the worryingly lacklustre pace of business growth underscores the risk to the economy from higher borrowing costs."

Financial markets on Tuesday pointed to a roughly 60% chance that the BoE will raise interest rates on November 5, the week after Healey delivers his October budget.

The PMI did, however, add to positive news for Britain's manufacturing sector, a day after the Confederation of British Industry's gauge of orders hit a more than three-year high.

The flash manufacturing PMI rose to 52.0 in September from 51.7 in August, helped by rising domestic orders. Optimism in the sector hit a seven-month high.

The composite PMI, which combines the manufacturing and services surveys, fell to 51.7 in September from 52.5.