Inflation in services sector surges to three-year high

Inflation in Ireland’s services sector rose to its highest level in three years in October as rising energy costs prompted providers to increase their prices.

AIB’s latest purchasing managers’ index (PMI) for the sector, which covers everything from hotels to hairdressers and telecoms, pointed to a continued expansion in activity in October.

However, concerns over rising inflation weighed on the 12-month outlook with the subindex for future activity posting the biggest month-on-month drop since March 2022.

“Weaker expectations were partly linked to concerns over inflation, with a jump in cost pressures in October mainly due to fuel and energy,” the bank said.

“This led to the steepest increase in charges for services since February 2023.”

AIB’s latest PMI signalled that activity in the sector expanded for the sixth month running in October with the headline index figure rising marginally to 54.3. Anything above 50 signals expansion.

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“That said, the pace of expansion remained below the long-run survey average since 2001,” AIB said.

The rate of growth in the Irish services PMI was ahead of the flash euro zone and UK PMIs at 51.7 and 53.1, respectively but below the US PMI at 57.9.

Technology, media and telecoms (at 55.9) recorded the strongest growth despite seeing a slowdown compared with September. Transport, tourism and leisure (54.5) and business services (54.2) also recorded increases while financial services (52.6) posted what AIB said was “another subdued rate of expansion”.

Businesses in the sector reported a further solid increase in new work in October, albeit at a softer rate than in September.

“The overall slowdown in the rate of growth in total new work was partly driven by a broad stagnation in international new business,” the bank said.

Employment in the sector continued to grow but at a subdued rate.

AIB noted that inflationary pressures rose in October, heavily linked to fuel and energy prices but also due to wages and supply shortages.

As a result, businesses were prompted to raise prices.

“To counter rising costs, service providers increased their own charges at the sharpest rate since February 2023,” it said.

The transport, tourism and leisure sector recorded the strongest increase in prices, and one of the largest month-on-month gains in the series history.

AIB chief economist David McNamara noted that input price inflation for businesses accelerated again in October.

“Cost hikes were driven by wage pressures, as well as energy and supply shortages,” he said.

The rate of increase in prices charged also picked up to the highest level in over three-and-a-half years, as services firms managed to pass on costs and protect margins,” McNamara said.

“In terms of the outlook, business sentiment dipped notably in October, reaching a six-month low,” he said.

“A number of survey respondents mentioned that high inflation and uncertainty were undermining the outlook,” McNamara said.