Input price inflation in services sector stays near 22-year high

Input price inflation in the services sector in Ireland remains at near-record levels, according to AIB. The sector, which includes everything from hotels and hairdressers to IT firms and telecoms, has been rebounding strongly from the pandemic. However, like other sectors, it is also in the grip of an inflationary spiral driven by record high energy prices and increased wage demands.

AIB’s latest services purchasing managers’ index (PMI) pointed to further sharp increases in business activity and new orders in the sector but also “steep rises in input costs and selling prices”.

The bank’s headline index posted a reading of 60.2 in May, down from 61.7 in April – anything above 50 denotes an expansion in activity. Activity has now risen in each of the past 15 months, but the latest expansion was the softest since January, AIB said, while noting a lack of restrictions related to the Covid-19 was a key factor supporting growth.

However, it also noted the sector experienced severe cost pressures again in May, “with the rate of input price inflation accelerating to a pace only just shy of March’s survey record”.

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The survey of businesses in the sector found that about two-thirds had experienced a rise in input prices during the month amid widespread reports of increased fuel and wage costs. Inflation was most pronounced in the transport, tourism and leisure sector.

In response, companies have raised their own selling prices rapidly, it said. The rate of inflation was the second-steepest in the survey’s 22-year history, just behind April’s record.

The sub-index for employment recorded its fastest rate of growth since last July, reflecting the current tightness of the Irish labour market. The strongest overall level of expansion was once again in the transport/tourism/leisure category. This sector continued to see the fastest growth in total activity, new business, exports, outstanding business and employment, AIB said.

The bank’s chief economist, Oliver Mangan, said: “There was another marked rise in new business for Irish services firms, including exports, as they continued to benefit from the release of pent-up demand.

“Meanwhile, businesses continued to experience severe upward pressure on input prices, in particular, fuel and wage costs. This in turn is leading to higher prices being charged to customers. Indeed, the rate of growth in both input price inflation and prices charged was the second-fastest in the 22-year history of the survey.”

In outlook terms, the report said a continued recovery from the Covid-19 and rising new business is expected to lead to further growth of activity over the coming year. That said, business confidence remains some way below that seen prior to the outbreak of war in Ukraine