Surprise news of UK growth masks increasing pain from inflation

theguardian.com:

Crisis, what crisis? Stagflation, what stagflation? On the face of it, the solid rise in UK economic activity in May suggests the outlook is not as bad as previously feared.

No question, the monthly estimate of growth from the Office for National Statistics was a surprise for the financial markets – and for once a surprise on the upside.

The City had been expecting gross domestic product to expand by 0.1% rather than the actual 0.5% increase. April’s decline was also smaller than originally thought – 0.2% instead of 0.3%.

Even so, a look beneath the bonnet of the economy shows evidence of the strains caused by rising inflation, especially in the services sector – which accounts for about 80% of GDP.

The ONS divides services into two main categories: consumer-facing services, which includes spending on the high street, in restaurants and hotels and on travel; and non-consumer-facing services, which includes categories such as health, education, banking and insurance.

Service sector output overall grew by 0.4% in May – in large part because of an increase in GP appointments – and was the biggest contributor to the economy’s growth. Consumer-facing services, however, fell by 0.1%. There was a drop of 0.5% in the retail trade, and there was a 5.3% decline in sports, recreation and amusement activities.

It was not all bad news. As the scenes of disruption at UK airports have shown, plenty of people are looking to go abroad on holiday and this was reflected in an 11% increase for travel agencies and tour operators.

So far at least, the GDP data suggests a lot of consumers are deciding what matters to them rather than stopping spending altogether. The chances of the Bank of England raising interest rates by 0.5 percentage points