The UK's dominant services sector lost some momentum in September, even as the cost pressures that have kept inflation sticky showed signs of reigniting. That awkward combination is landing just as the new government prepares its first budget and the Bank of England weighs its next move on interest rates.
S&P Global's flash UK Services Purchasing Managers' Index (PMI) fell to 51.7 in September from 52.5 in August. Any reading above 50 signals that activity is still expanding, so the sector remains in growth territory. But the dip suggests the pace of that growth is slowing, and the survey's own estimate points to quarterly economic growth of just 0.1% — down from 0.4% in the second quarter.
What's behind the numbers
The PMI is a closely watched gauge of business conditions, compiled from surveys of purchasing managers at hundreds of companies. It captures everything from new orders and employment to the prices firms are paying and charging. For the UK, services matter enormously: the sector accounts for around four-fifths of the country's economic output, so its health tends to set the tone for the whole economy.
September's reading suggests the services engine is sputtering. New work slowed, and firms reported softer demand from both domestic and overseas customers. That fits with a broader picture of a UK economy that has been growing only modestly, squeezed by the lingering effects of high interest rates and the cost-of-living crisis.
Yet the same survey also found that price pressures are building again. Services companies reported faster increases in their input costs and in the prices they charge customers. That is a red flag for the Bank of England, which has been trying to bring inflation down to its 2% target. Services inflation has been one of the stickiest components of UK price growth, and any renewed acceleration could delay further rate cuts.
A tricky moment for policymakers
The timing is uncomfortable for the Bank of England. It has already begun trimming interest rates from their multi-decade highs, but it has stressed that it will move cautiously, watching the data closely. A cooling economy argues for lower rates to support growth, but firmer price pressures argue for keeping them higher for longer. The September PMI pulls in both directions at once.
It also complicates the task for John Healey, the UK's finance minister, who is preparing his first budget. The new government has promised to boost investment and improve public services, but it has also warned of tough choices on spending and taxes. Slower growth means less tax revenue coming in, while sticky inflation could keep borrowing costs elevated. That tightens the fiscal room for manoeuvre just as the government is setting out its priorities.
The budget is expected to lay out the government's tax and spending plans for the coming years, and investors will be watching closely for any signals on borrowing and fiscal discipline. A weaker economy and persistent inflation could force the Treasury to choose between supporting growth and keeping the markets reassured.
What it means for investors
For everyday investors, the key takeaway is that the UK economy is in a delicate spot. Slower growth is usually a headwind for company profits and stock prices, particularly for domestically focused businesses like retailers, restaurants, and financial services firms. But the pickup in price pressures could mean interest rates stay higher for longer, which tends to weigh on valuations across the board.
Bond investors, meanwhile, will be watching the inflation signals closely. If services prices keep climbing, the Bank of England may hold off on further rate cuts, which would keep yields on UK government bonds relatively elevated. That affects everything from mortgage rates to the returns on savings accounts.
The broader global picture is similar. Central banks in many developed economies are wrestling with the same dilemma: growth is cooling, but inflation hasn't fully been tamed. As we've noted, energy costs are keeping inflation sticky in many places, and other central banks are also pausing rate cuts as they weigh those risks.
For UK investors, the next few weeks will be pivotal. The final PMI reading, the next inflation print, and the budget itself will all help clarify the path ahead. Until then, the message from September's data is that the economy is slowing, but the inflation fight isn't over.
