Service sector continues to expand but inflation a persistent worry

Activity in the Republic of Ireland’s services sector expanded again in February but the growth was accompanied “by rising price pressures”, AIB has said.

The bank’s latest purchasing managers index for services rose to 54.4 last month, up from 50.5 in January, signalling the fastest rate of expansion in six months. Any figure above 50 indicates expansion.

The increased level of activity, however, was accompanied by a worrying uptick with input prices and charges rising at the fastest rates in 10 and 12 months respectively. Wages were again the key driver of inflation, while transport firms also highlighted fuel costs.

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Transport, tourism and leisure recorded the strongest input price inflation of the four main sectors, but the weakest charge inflation. Financial Services posted the fastest increase in charges.

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European Central Bank policymakers have continually raised concern about service sector inflation, indicating a desire to see it on a downward trend before moving to cut interest rates.

On the upside, AIB’s latest gauge suggests total service sector activity and new business rose at the fastest rates in six months, driving the sharpest rate of job creation for eight months.

The services sector, which includes everything from hotels and hairdressers to IT firms and telecoms, had rebounded strongly from the pandemic in 2022 but last year brought a pronounced cost-of-living squeeze and higher interest rates, which weakened demand, dragging down spending on services. The latest reading is still below the long-run trend, said AIB.

Nonetheless, companies cited a stronger increase in European demand as new export business rose at the sharpest pace in six months. February was also the 36th consecutive month of expansion in the sector, extending a sequence that began in March 2021.

All four sub-sectors monitored registered higher activity in February. Financial services (57.6) posted the fastest growth for the third month running, ahead of transport, tourism and leisure (53.7) and technology, media and telecoms (53.7). Business services (51.3) registered only modest growth, albeit a notable improvement compared with January’s near-three year nadir, said AIB.

“Irish firms continued to report rising levels of new business across all sectors, and this was linked in part to robust international demand,” said the bank’s chief economist, David McNamara.

“The volume of outstanding work also increased on the month, following a dip in activity in January. At the sectoral level, all four sub-sectors covered in the survey registered growth overall — led by robust growth in financial services in particular. Business sentiment about the prospects for activity over the coming 12 months also improved, helped by increasing expectations of economic recovery, lower interest rates, and new product developments,” he added.

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