Activity in Britain's dominant services sector grew at its fastest pace in eight months in January as business recovered from December's snow disruption, a survey showed, bolstering the case for higher interest rates.
Thursday's purchasing managers' survey from Markit/CIPS also showed a record jump in input cost inflation in the services sector, which is likely to worry Bank of England policymakers who hold their monthly rate-setting meeting next week.
The headline services PMI activity index rose to 54.5 in January from a 20-month low of 49.7 in December, the highest since last May and well above forecasts for a reading of 51.4.
Sterling rose to a three-month high versus the dollar and gilt futures extended losses after the data as investors bet the BoE would lift rates from record lows of 0.5%.
Many economists see a rise later this year to tackle increasing inflation and are debating whether it could come as early as next week.
The Conservative-led coalition would prefer to see the cost of borrowing remain low when they are driving through unprecedented cuts in public spending to rein in a budget deficit running in excess of 10% of national output.
The BoE's Monetary Policy Committee is divided over whether to raise interest rates to show it is serious about fighting inflation or wait to see how the economy fares after a shock 0.5% contraction in the last three months of 2010.
"This was particularly strong, which is encouraging news that suggests the fall that we saw in the previous month was almost all related to the snow," said George Buckley of Deutsche Bank.
"I still think the Bank of England is going to want to see more than just this. They might want to see, for example, what happens after this volatility between December and January.
"I don't think the BoE will go in February, but I think it is obviously a risk."
MODEST GROWTH
Chris Williamson, chief economist at survey compiler Markit, said this week's PMI surveys indicated the economy was growing at an underlying quarterly rate of around 0.4%.
Markit said some businesses in the services sector had received additional orders in January, displaced from December after Britain suffered its coldest ever start to winter.
Business leaders have been calling on the government to come up with a clearer strategy to support growth. Some economists have talked of a possible return of a form of "stagflation" — the toxic mixture of higher prices and stagnation Britain endured in the 1970s.
The survey showed input cost inflation rose at its fastest pace since August 2008. The input cost index rose to 65.8 from 60.5 — the largest jump since the survey began in 1996.
The BoE's deputy governor Charlie Bean said this week that the central bank may be forced to raise rates if inflation becomes embedded.
More than a third of firms said their costs had risen over the month, citing January's rise in value-added tax to 20% and higher fuel prices as the main factors.
Worryingly for policymakers, firms passed on price increases at their fastest rate since September 2008.
Optimism about the one-year outlook hit its highest level since last May, but service providers cut staffing levels for a fourth successive month.
"Demand for consumer services remains particularly under pressure from widespread job insecurity and squeezed incomes, as real wages fall and prices continue to rise," Markit's Williamson said.
