Inflation is creeping back through services

Britain’s latest business surveys suggest the next inflation squeeze may not announce itself first in shops or factories. It may arrive through service contracts, transport charges, software renewals, maintenance bills, and business travel costs that rise faster than companies can pass them on. March data showed the UK services sector still growing, but only just, while cost pressures accelerated sharply.

S&P Global’s services PMI fell to 50.5 in March from 53.9 in February, its weakest reading in 11 months. More striking was the jump in input costs. The index measuring prices paid by service businesses rose to 68.4 from 63.1, the biggest month-on-month increase since 2021, with around 40% of companies reporting higher costs. Energy, raw materials, and transport were all cited as sources of pressure. Prices charged to customers also rose, but not enough to suggest a simple or painless pass-through.

Service businesses are often assumed to be insulated from the kind of commodity shock that hits manufacturers first. In practice, they are not. They still pay for fuel, freight, insurance, rent, outsourced inputs, equipment, and supplier mark-ups. When oil and shipping costs climb, the effect spreads through cleaning contracts, staffing bills, maintenance work, hospitality, software support, and professional retainers. Construction data published a day later pointed in the same direction, showing the biggest leap in cost inflation on record and worsening supply-chain performance as shipping delays fed through from disruption in the Strait of Hormuz.

The difficulty is not only that costs are rising. It is that demand is softening at the same time. The March services survey showed new export business falling at the fastest rate in 11 months, while broader optimism slipped to its weakest level since June last year. Britain’s housing market has also cooled, with a Royal Institution of Chartered Surveyors survey showing buyer demand, sales expectations, and house prices all weakening as higher mortgage rates and geopolitical uncertainty unsettled households. When customers are already cautious, companies can struggle to reprice quickly enough to protect margins.

This is why service-sector inflation can be both quieter and more stubborn than the version consumers notice on the shelf. Manufacturers often have clearer cost lines and more visible price rises. Services absorb pressure in more places. A company may trim scope, reduce discounts, repackage support, or quietly push up renewal terms rather than announce a headline increase. The effect is slower, less dramatic, and often harder to trace — but it still feeds into client budgets and investment decisions.

The risk now is that businesses wait too long to acknowledge how broad the pressure has become. Service inflation does not need a factory outage to take hold. It needs sustained rises in energy, transport, insurance, and financing costs, coupled with customers who are reluctant to absorb them. March’s numbers suggest that combination is already visible. The squeeze is no longer confined to the supply chain. It is moving through the service economy, one invoice at a time.