UK Services Growth Outshines Manufacturing, but Rising Prices Cast Doubt

Nomura's European Economics team has highlighted that the UK composite output PMI rose to 52.5 in August, driven by services offsetting weaker manufacturing. The strong service sector growth was reflected in the GfK consumer confidence data, which improved to its highest level in two years.

However, this increase came with a caveat: rising inflation signals. The composite input and output price indices climbed further above February levels, indicating potential upside risks for interest rates if price pressures persist.

Nomura forecasts no change in the Bank of England's (BoE) interest rate policy this year, but acknowledges that these rising prices may necessitate a rate hike in the future. To gauge potential second-round effects, policymakers will be keeping a close eye on other price indicators, including the BoE's own DMP survey.

The UK manufacturing output index declined in August, whereas services drove the overall increase in the composite index.