Latest flash PMI numbers a ‘Goldilocks scenario of higher growth and lower inflation’

With the first rate cut instigated by the Bank of England earlier in the month came rising business activity and stronger demand.

This led to an increase in staff hiring with the rate of employment growth the fastest since June 2023. More optimistically, respondents felt upbeat about the economic outlook.

But perhaps most crucially, inflationary pressures as a whole moderated across the private sector in August. Input costs rose at the slowest pace since January 2021 and marks a new low from last month. Any uptick in the manufacturing sector from freight rates were wiped out by the slowdown in inflation in services sector.

This comes as a result of fewer supplier surcharges and more competitive market conditions.

It’s crucial to point out that the PMI surveys’ input price inflation gauge has had a 100% record thus far in predicting the decline in services inflation this year. With services inflation falling to a 3.5 year low, this could mean that services inflation could drop yet again in August from 5.2%, contrary to the Bank of England’s forecast for a rise to 5.8%.

John Choong, head of equities and markets at Investors Edge said, “The latest flash PMI numbers are serving up a rare economic treat — a Goldilocks scenario of higher growth and lower inflation. With private sector output expanding at its fastest clip since April, and input costs rising at the slowest pace since January 2021, this is an economic sweet spot.

“However the real kicker lies the PMI surveys’ input price inflation gauge, which has been spot-on in being a leading indicator for services inflation declines this year. If this trend holds, we could see August’s services inflation drop further, defying the Bank of England’s expectations of a rise to 5.8%.

“This unexpected combo could be the game-changer for a September rate cut, despite the BoE’s previous caution. It’s a potential economic hat-trick — faster growth, cooling inflation, and the possibility of looser monetary policy.

“If this golden run continues, don’t be surprised to see UK GDP forecasts revised upwards, potentially crowning the UK as the G7’s star performer in 2024.”

Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments said, “The latest Flash PMI figures for August reveal an encouraging trajectory for the UK’s private sector, with the Composite PMI at 53.4, the services sector at 53.3, and manufacturing at a 26-month high of 52.5.

“This positive momentum in business activity and employment growth raises the prospect of upward revisions to GDP forecasts. However, whether it will outpace its G7 counterparts by the end of the year remains to be seen. Furthermore, inflationary pressures are moderating, with input costs rising slowly since January 2021.

“When considering the PMI’s predictive accuracy for services inflation, this trend suggests a potential decline in services inflation below the Bank of England’s forecast of 5.8%. If inflation continues to ease, it may allow the BoE to consider further rate cuts, and the markets may begin to price in more certainty of a September rate cut if these trends persist.”