Fresh data on the UK services sector showed price inflation weakening for the third month in a row, now rising at the slowest pace in over three years.
Economists and analysts said this raised hopes for an interest rate cut from the Bank of England this summer, but not necessarily at next week's meeting.
The S&P Global services purchasing managers' index was 52.9 in May, as expected, down from 55.0 in April.
This week's services and manufacturing PMI surveys imply GDP growth of around 0.3% so far in the second quarter, with the composite PMI falling to 53.0 in May from 54.1 in April, above the initial estimate of 52.8.
The survey showed a reasonable rate of expansion in the UK service sector, with inflation of particular interest to the immediate economic outlook as the Bank of England moves towards cutting interest rates, potentially as soon as this month, said Joe Hayes, principal economist at S&P Global.
A cooling in the rate of input cost inflation was reported by survey respondents, down to the weakest level since February 2021, which fed through to output prices as companies were less aggressive with their price setting.
"That's now three months in a row that selling price inflation in the service sector has eased – this will be very encouraging to the (Bank's) Monetary Policy Committee and suggests the trajectory of services prices is moving in the right direction," said Hayes.
"It is worth noting, however, that the PMI's gauge of UK services inflation is still sitting well above its pre-pandemic trend, which may give more weight to those suggesting the Bank of England hold out until August to loosen policy."
April blowout a flash in the pan
Economist Rob Wood at Pantheon Macroeconomics agreed that the big news was further signs of easing inflation pressure, which he said would provide encouragement for the MPC as the services input and output price indices dropped.
"The PMI suggests April’s blowout services inflation print was a flash in the pan and should not be taken as a sign of strong annualised inflation continuing. Slowing services inflation can keep the MPC on track to cut rates in August, as we expect," said Wood.
Marc Cogliatti, head of capital markets at Validus Risk Management, said the survey indicated that the UK’s largest economic sector is in relatively good shape and aligns with his belief "that the BoE will not reduce rates anywhere near as aggressively as the market had anticipated at the beginning of the year.
"This is partly because there is no urgent need to stimulate growth and partly due to the potential risk of inflation rising again later this year."
Economists said the PMI data indicated robust UK growth, but that GDP growth will slow slightly from the first quarter's 0.6% increase.
On Pantheon's calculations, the average composite PMI reading in April and May of 53.6 is consistent with 0.3% quarter-to-quarter GDP growth in the second quarter, above the MPC’s forecast of 0.2%.