Service sector firms cut jobs at the fastest rate for four years last month, as concerns over subdued consumer sentiment worsened.
While the sector grew slightly in January, the rate of growth fell slightly compared with last month, according to a closely watched survey of firms, while costs also rose ahead of increased taxes and minimum wage requirements coming in this April.
The S&P Global UK services PMI survey scored 50.8 in January, down from 51.1 in December and the joint lowest level for 15 months.
Any reading above 50 means a sector is in growth, while a score below this means it is shrinking.
The January score was slightly behind the 51.2 reading predicted by a consensus of economists.
Businesses widely noted sharply rising salary payments, and many also felt the impact of suppliers passing on forthcoming increases in employers' national insurance contributions
While the sector saw a slight growth in output in January, firms reported that the rate of cost inflation was also the highest for nine months, which in turn pushed up prices for consumers.
This was caused by rising salary payments and efforts by suppliers to pass on higher costs, before national insurance contributions (NICs) increases announced at the October Budget come into effect in April.
The heightened inflation mixed with sluggish growth underscores the challenge facing the Bank of England, which will announce its latest decision on interest rates on Thursday.
The Bank generally only cuts the base rate when inflation is under control, but is under pressure to do so now in order to boost growth.
And inflation in the services sector, which accounts for about four-fifths of the UK economy, is a closely watched metric for policymakers.
Most experts expect a quarter-point cut to 4.5% at Thursday’s decision.
Tim Moore, economics director at S&P Global Market Intelligence, pointed to rising taxes announced in the October Budget as one of the reasons for a “challenging” environment for services firms.
The twin perils of shrinking workloads and rising payroll costs meant that many service providers put the brakes on recruitment in January
He said “stagflation conditions” – a combination of rising inflation and sluggish economic growth – appeared to take “a firmer hold”.
“Output levels increased only marginally, while input cost inflation accelerated for the fifth month in a row to its highest since April 2024.
“Businesses widely noted sharply rising salary payments, and many also felt the impact of suppliers passing on forthcoming increases in employers’ national insurance contributions.”
He added that high interest rates and geopolitical uncertainty are among the other headwinds facing companies.
“The twin perils of shrinking workloads and rising payroll costs meant that many service providers put the brakes on recruitment in January,” he said.
Conservative shadow business secretary Andrew Griffith said the drop in employment is “devastating”.
He blamed tax increases at the Budget, adding that workers are “paying the price”.
