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Inflation is building again as the UK's dominant service sector begins to recover a little too much confidence.
This is good news for office landlords — whose tenant base is in increasingly fine form — but the likely consequence is that property borrowers face even steeper interest rates following this week's Bank of England Monetary Policy Committee meeting.
The Bank of England Monetary Policy Committee meets on Thursday 11 May. At its last meeting in March 2023 it pushed interest rates up to 4.25%, and the expectation among analysts is that rates will rise again to 4.5% this week, before plateauing and perhaps falling in 2024.
The hints that inflation is picking up speed, rather than declining, come in the latest S&P Global/Chartered Institute of Procurement and Supply monthly procurement managers index. Data from the same source showed that inflation in the construction sector is even more pronounced.
The latest predicted rate rise comes as landlords face a squeeze between higher loan servicing costs and write-downs on asset value, a combination already causing serious headaches. Last week it emerged that investments like Birmingham's 698K SF Mailbox complex, owned by Mailbox REIT, fell into technical loan default on 20 April after the loan-to-value ratio landed above 60%.
Inflation may have reignited in the UK, fanned into life by the economy's springtime revival giving businesses the confidence to pass on higher costs to customers.
The PMI index showed rapid growth in activity, but an equally rapid growth in prices.
At 55.9 in April, up from 52.9 in March, the headline seasonally adjusted activity index signalled a strong rise in output levels across the service economy, the report said. The headline index has now registered above the neutral 50.0 value for three months running and the latest reading pointed to the fastest rate of growth since April 2022, the report said.
However, the report added that around 48% of the survey panel reported a rise in input costs, while only 3% signalled a fall, and the overall rate of input price inflation accelerated for the first time since November 2022.
Anecdotal evidence suggested that wage pressures remained the main factor leading to higher prices charged, the report's authors said.
The PMI data suggested that recessionary fears were overplayed, but that inflationary fears may have been consigned to history a little too quickly.
Construction PMI data, released last week, suggested rising volumes of work in the commercial property sector, offset by continued steep decline in residential activity.
At 51.1 in April, the headline seasonally adjusted S&P Global/CIPS UK Construction Purchasing Managers’ Index was up very slightly from 50.7 in March and above the neutral 50.0 value for the third month in a row.
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