Britain’s services sector showed a clear pickup in momentum at the start of the year, offering signs that activity and confidence are stabilising after a weak end to 2025.
At the same time, firms reported a sharp acceleration in prices charged to customers, reintroducing inflation concerns just as policymakers weigh the next steps for interest rates.
The latest survey data paints a mixed picture for the UK economy, with stronger growth signals offset by persistent cost pressures and a prolonged hiring slowdown.
Data from S&P Global showed that the UK Services Purchasing Managers’ Index rose to 54.0 in January, up from 51.4 in December.
The reading was the highest since August 2025, indicating a solid expansion in activity across the sector.
Although it came in slightly below an earlier flash estimate, the figure still marked a notable improvement from late last year, when demand conditions were softer.
Services activity gains traction
PMI readings above 50 indicate growth, and January’s result pointed to a broad-based rise in activity across consumer-facing and business-oriented services.
Firms reported improved order flows and a more stable demand environment compared with the final months of 2025.
Export orders also strengthened, increasing at the second-fastest pace since October 2024.
The stronger services performance followed an upbeat manufacturing survey earlier in the week.
When combined, the two lifted the composite PMI to 53.7 in January from 51.4 in December.
This marked the highest level since August 2024, reinforcing the view that overall private-sector activity entered 2026 with firmer momentum, even if growth remains uneven.
Confidence steadies after fiscal clarity
Business confidence improved noticeably in January, with expectations for future output reaching their strongest level since October 2024.
That period had coincided with unexpectedly large tax increases on companies announced by finance minister Rachel Reeves, which had weighed heavily on sentiment.
Confidence deteriorated again ahead of Reeves’ second budget in November 2025, which included £26 billion in tax increases. However, many of those measures were deferred and less heavily targeted at businesses than the previous year.
Firms reported that greater clarity after the budget helped stabilise planning and contributed to the improvement in confidence seen at the start of 2026, even as concerns about weak consumer demand persisted.
Hiring pressures persist
Despite stronger activity and improved confidence, the labour market picture remained subdued.
Employment in the services sector fell for the sixteenth consecutive month in January, representing the longest uninterrupted decline since 2010.
Firms continued to trim staffing or leave vacancies unfilled as they sought to contain rising payroll costs.
Hospitality businesses were among those reporting the greatest pressure, citing higher wages and uncertainty about the wider economic environment.
Britain’s main minimum wage is set to rise by 4.1% to £12.71 an hour in April, following a 6.7% increase last year, adding further strain to cost structures.
The extended decline in hiring highlights a disconnect between improving output and firms’ reluctance to expand their workforce.
Prices sharpen policy dilemma
Cost trends in January added complexity to the policy backdrop. While input cost inflation eased slightly compared with December, prices charged by services firms rose at their fastest pace since August.
The acceleration suggests companies are still passing higher costs on to customers, even as overall demand remains fragile.
This development is particularly significant for the Bank of England, which closely monitors services inflation as a gauge of domestically generated price pressures.
The central bank is expected to keep interest rates unchanged at 3.75% at its meeting this week, but the rebound in services prices complicates decisions around the timing and pace of future rate cuts.
Financial markets are currently pricing in one or two quarter-point reductions in 2026.
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