UK service companies have increased their prices at the fastest rate since 1996 as higher energy bills and transport costs squeezed the cost of living.

The IHS Markit/CIPS Purchasing Manager's Index (PMI) rose to 54.1 in January from December's 10-month low of 53.6. Any figure above 50.0 denotes growth.

"Demand has started to recover from the impact of Omicron restrictions and most businesses expect only a temporary slowdown from cancelled bookings and staff absences at the turn of the year," IHS Markit economics director Tim Moore said.

Hospitality firms in particular suffered a slump in sales over the Christmas and New Year period.

Stronger new order intakes and positive sentiment towards the year ahead outlook led to another robust rise in employment numbers in January. Increased staffing levels have been recorded in each month since March 2021.

Read more: UK factory output hits six-month high

However, with energy bills, transport costs and staff salaries rising, companies passed on costs to their consumers by raising prices in January at the fastest rate since the survey began in July 1996.

“Record price increases in the service economy are set to add to the cost of living crisis for UK households. Input cost inflation accelerated again in January and service providers responded by increasing their prices charged at the fastest rate since the index began in July 1996,” Moore said.

Nearly one-in-three survey respondents reported higher average prices charged than in December, with rising salary payments, energy bills and logistics costs the most commonly cited reasons.”

Longer wait times to recruit new employees and widespread staff absences due to COVID-19 cases contributed to another increase in backlogs of work across the service economy in January. Higher levels of unfinished business have now been recorded for 11 months running.

Despite another month of severe cost pressures and disruptions to business operations due to COVID cases, the latest survey data pointed to a strong improvement in growth projections for the year ahead.

Around 61% of firms forecast a rise in activity, compared to just 9% that expect a decline. Confidence was the highest since May 2021 and often reflected optimism about the pandemic outlook.

Read more: COVID drags down UK retail sales for January

"Over 60% of service providers were optimistic about trade in 2022 as job creation resumed in earnest but a worker shortfall remained. Great news for job hunters looking for their next opportunity but a headache for businesses trying to reach full capacity amongst strong competition for staff should recovery speed up,” Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said.

"With the highest inflation for prices charged since July 1996 leading to a considerable squeeze on household budgets, the consumer appetite for services they missed over the pandemic may be short-lived.”

The Bank of England is set to vote this Thursday on a potential rate change as inflation soars to 30-year high.

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