Britain’s services sector closed out 2025 on a weaker footing than initially expected, according to the final reading of the S&P Global UK Services Purchasing Managers’ Index (PMI). While business activity remained slightly above the 50-point threshold that separates growth from contraction, the survey revealed rising input costs and increasing prices, raising concerns about potential inflationary pressures on consumers.

Services Sector Growth Disappoints

The final UK Services PMI for December 2025 edged up marginally to 51.4, compared with 51.3 in November, but fell short of the provisional December estimate of 52.1. The data indicates lacklustre growth in the UK service economy, reflecting subdued demand despite some signs of recovery in business optimism.

Tim Moore, economics director at S&P Global Market Intelligence, noted:

“Lacklustre business activity growth continued across the UK service sector at the end of 2025. Meanwhile, inflationary pressures across the service economy strengthened at the end of the year. Input prices rose to the greatest extent for seven months, and output charge inflation rebounded from November’s recent low, despite the subdued demand backdrop.”

Rising Costs and Inflationary Pressures

Input costs for service firms surged in December at the fastest pace since May, driven by higher staff costs, increased raw material prices, and rising fuel expenses. Analysts attributed part of the wage pressure to Finance Minister Rachel Reeves’ first budget, which introduced significant fiscal measures.

Output prices charged by firms also accelerated sharply, climbing at the fastest rate since August, signaling that businesses are passing higher costs onto consumers. The increase in prices comes ahead of a scheduled 4.1% rise in the UK minimum wage, set to take effect in April 2026, bringing it to £12.71 per hour.

The Bank of England (BoE), which cut interest rates last month to 3.75%, has cited persistently high services inflation as a constraint on how aggressively it can lower borrowing costs. Investors currently anticipate one or two quarter-point rate cuts in 2026, depending on inflation trends and economic performance.

Mixed Signals From Business Activity

Despite the weak finish to the year, the PMI survey hinted at some improvement in business sentiment. New orders rose in December after four months of decline, exports increased for the first time since August, and respondents reported higher consumer confidence and increased business investment.

However, firms also expressed concerns over rising costs, weak overseas demand, and the broader economic outlook for Britain. Hiring in the services sector declined for the 15th consecutive month, although the pace of contraction slowed slightly compared with November.

Composite PMI Shows Modest Recovery

Combining the services PMI with last week’s manufacturing survey, the composite PMI rose to 51.4 from 51.2 in November, though it remained below the provisional estimate of 52.1. The data underscores a mixed economic picture: while some areas show resilience and renewed optimism, others continue to face pressure from inflation, staffing shortages, and international trade challenges.

Outlook for UK Economy in 2026

Economists warn that persistent price pressures in the services sector could continue to weigh on consumers’ spending power in early 2026. At the same time, gradual improvements in business sentiment, exports, and new orders offer some hope that the UK economy may stabilize after a challenging end to 2025.

As the Bank of England monitors inflation closely, policymakers face a delicate balance between supporting growth and preventing further price increases in the service economy, which accounts for the majority of UK GDP.