Inflationary pressures continue to mount in October

West Midlands companies were able to secure more work in October, despite charging more for goods and services, which underpinned a further upturn in output.

The NatWest West Midlands PMI Business Activity Index – a seasonally adjusted index that measures the month-on-month change in the combined output of the region’s manufacturing and service sectors – was up from 56.3 in September to 56.9, signalling growth for the ninth month in a row and the strongest increase since July.

Capacity expansion efforts, strengthening demand, and rising customer numbers were among the reasons cited for higher business activity.

Firms in the West Midlands recorded an eighth successive monthly rise in new work intakes in October. Where sales increased, panellists cited improved market confidence, better underlying demand and the easing of travel restrictions. The pace of expansion was sharp and quickened from September, but was nonetheless the second-slowest over the aforementioned sequence of growth.

West Midlands companies continued to report higher operating expenses in October, with the overall rate of inflation accelerating from September. Furthermore, the latest increase was the third-sharpest in the series history, beaten only by those recorded in June and July 2008. Raw material scarcity, labour shortages, difficulties with transportation and the supply-chain crisis were among the reasons cited for rising expenses. The rate of input cost inflation in the region was above the national average for the fifteenth straight month.

For the second month in a row, the overall rate of output charge inflation in the West Midlands reached a series record. One-third of monitored companies signalled higher output charges, against only 1% that reported a reduction. Firms overwhelmingly linked the upturn in fees to the sharing of additional cost burdens with clients. Output prices in the West Midlands continued to increase at a stronger rate than that seen across the UK as a whole.

Private sector companies in the West Midlands remained strongly confident that business activity would expand over the course of the coming year. The overall level of positive sentiment fell slightly from September, but remained well above its long-run average. Survey members indicated that demand is expected to strengthen as the pandemic recedes, supporting output. Some hope to secure new clients and intend to innovate. The degree of optimism among local firms outstripped the UK average.

Private sector jobs in the West Midlands rose further in October, stretching the current sequence of growth to eight months. The rate of increase was sharp and quickened from September’s five-month low. Survey members linked the upturn in employment to robust rises in new work intakes and an associated need to expand capacities. Regionally, the West Midlands came third in the rankings for job creation, behind London and the North West.

As has been observed on a monthly basis since March, unfinished work among West Midlands firms rose in October. The pace of backlog accumulation was sharp, quicker than that registered in September and one of the strongest seen in the series history. According to panel members, staff and material shortages contributed to the latest upturn in outstanding business. The expansion in backlogs in the West Midlands was the second-fastest regionally, after Wales.

John Maude, NatWest Midlands and East regional board, said: “West Midlands companies welcomed a strong influx of new work in October, which led them to scale up output and create more jobs. Capacities were expanded as firms sought to accommodate for robust demand conditions and clear backlogs.

“While growth prospects for the region look bright, and firms indeed forecast expansion in the year ahead, there are many downside risks to the outlook. Companies reported challenges finding suitable candidates to fill open vacancies and struggled to source several materials. These shortages led to a substantial increase in their expenses, which in turn were passed on to customers. Prices charged for goods and services rose at an unprecedented rate, a factor that may dampen demand in the coming months.”