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PMI data for October indicates UK recovery but costs rising

09:28, 22 October 2021

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A UK factory worker wearing a helmet and holding a laptop in a factory
Although the UK economy is picking up, the manufacturing sector is still affected by supply-chain and staff shortages – Photo: Shutterstock

The UK economic recovery regained momentum in October, but supply shortages hit manufacturing growth, causing cost inflation to reach a new record high.

These are the latest findings from the IHS Markit/Chartered Institute of Procurement & Supply (CIPS) Flash UK Composite purchasing managers’ index (PMI) – (which includes IHS Markit/CIPS Flash UK Manufacturing Output Index).

The PMI data for October highlighted a robust and accelerated increase in UK private-sector business activity, with growth the strongest for three months.

Survey respondents widely reported buoyant business and consumer spending due to the roll-back of pandemic restrictions. Service providers led the recovery, but manufacturers signalled another slowdown in production growth due to severe shortages of staff and materials.

Supply-chain crisis

Stronger wage pressures and the worsening global supply-chain crisis contributed to the fastest rate of input price inflation at UK private-sector companies since this index began in January 1998.

At 56.8 in October, up from 54.9 in September, the headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index was the highest since July, and remained well above the neutral 50.0 mark.

Goods producers widely commented on difficulties meeting customer demand due to capacity constraints resulting from lengthy supplier lead times and shortages of staff. Around 64% of UK manufacturers reported worsening supplier delivery times in October, while only 1% saw an improvement.

Measured overall, new business volumes increased at a strong pace in October and the rate of expansion was the fastest for three months. A combination of rising demand and constrained capacity led to increased backlogs for the eighth month running.

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Manufacturers recorded a particularly steep rise in unfinished work, with the rate of backlog accumulation the fastest since June.

Job creation

Employment numbers continued to rise sharply in response to improving customer demand and strong confidence towards the business outlook. The rate of job creation was close to the record high seen in August, although survey respondents widely commented on difficulties finding candidates to fill vacancies.

Higher wages and worsening supply shortages resulted in a rapid pace of input cost inflation during October. The latest increase in average cost burdens was the fastest since the index began in January 1998.

Survey respondents often cited rising fuel, transport and energy bills, alongside steep price increases for items in short supply around the world – particularly semiconductor chips and other electronics components.

Interest rate-hike coming?

Commenting on the latest PMI data, Adam Hoyes, assistant economist at Capital Economics, said:

“Given that the PMIs should fall back naturally as the rapid rebound from restrictions eases, the uptick in the composite measure in October was a welcome surprise. This, alongside the evidence that price pressures are still building, increases the risk that the Bank of England will hike interest rates in the coming months.”

He added: “Overall, the PMI survey suggests our expectation of GDP [gross domestic product] stagnating in October may be a bit too pessimistic, and increases risk that the Bank of England will hike interest rates in the coming months.”

Read more: CBI warns UK government not to raise business tax

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