Vibrant growth in the eurozone and British services sectors brought with it new evidence of surging inflation pressures during January, according to business surveys published on Thursday. The Markit Services Purchasing Managers' Indexes (PMIs), which measure the activity of thousands of companies from banks to hotels, showed accelerating growth among the service sector firms that power the bulk of the European economy.
The surveys suggested price pressures will not ease any time soon - something confirmed by European Central Bank President Jean-Claude Trichet on Thursday after its Governing Council left interest rates on hold at a record low of 1.0 percent. He said inflation could rise further owing to commodity and energy price rises, and remain above 2 percent for most of 2011 before moderating around the turn of the year.
Thursday's PMIs showed the costs paid by companies for raw materials and fuel grew at the fastest rate in more than two years in the euro zone and UK. "There's no doubt that what the PMIs are showing you is that the increase in global input prices is significant, and it's showing up at both input and output price level in these surveys," said Malcolm Barr, economist at J.P. Morgan.
While eurozone firms largely absorbed these costs, British firms passed on price hikes to consumers at the fastest rate since September 2008, suggesting room for growing inflation expectations. "All this makes the upcoming (British) Monetary Policy Committee meeting a much closer call than markets price in," said Citi economist Michael Saunders in a research note.
The Markit Eurozone Services PMI rose to 55.9 in January from 54.2 in December, higher than an earlier flash estimate of 55.2 and its 17th month above the 50 mark that divides growth from expansion. However, surveys from individual bloc countries showed ongoing weakness in Spain and Italy. Britain's services PMI hit an eight-month high of 54.5, according to preliminary figure, up from the 49.7 in December that foreshadowed a shock economic contraction of 0.5 percent in the fourth quarters.
On Tuesday, manufacturing PMI data also rose across Europe, again showing rising inflation pressures. On Wednesday, Deputy BoE Governor Charles Bean said UK interest rates would have to rise if inflation, which in December hit 3.7 percent, becomes embedded. While economists still think the Bank will hold off raising rates until late this year, minutes from its January meeting showed the BoE is inching closer to tightening policy.
PMIs also showed strong growth among service sector firms in manufacturing-dominated economies of China and India, although there were also signs of soaring costs in the latter. While the Chinese non-manufacturing PMI eased to 56.4 in January from 56.5 in December, the Indian HSBC survey rose to 58.1 in January from 57.7 while the input prices index hit a 30-month high. Controlling inflation is the biggest headache for Indian central bankers. Data on Thursday showed India's food price index rose 17.05 percent in the year to January 22 and the fuel price index rose 11.61.