British business growth slowed to a three-month low in September while price pressures intensified, underscoring the difficult economic backdrop facing the government before next month’s Budget.

The S&P Global UK flash composite Purchasing Managers’ Index fell to 51.7 from 52.5 in August. Although a reading above 50 indicates expansion, the latest figure points to only modest private-sector growth, with survey data suggesting quarterly economic growth of about 0.1%.

Inflation pressure returns

Services activity weakened to its lowest level in three months, while prices charged by services companies rose at their fastest pace in four months. Businesses attributed the renewed pressure to higher energy and fuel costs linked to disruption associated with the Iran war.

Input-cost inflation accelerated for a second consecutive month, adding to concerns that the economy could face a combination of weak demand and persistent price pressures. That prospect complicates the outlook for the Bank of England, which must balance support for growth against the risk of inflation becoming entrenched.

Financial markets were pricing in roughly a 60% chance of an interest-rate increase at the Bank’s November meeting, according to the reporting on the survey. Higher borrowing costs are already weighing on business confidence and hiring intentions.

Manufacturing offers some resilience

The figures were not uniformly weak. Manufacturing orders reached their strongest level in three years, suggesting that industrial companies are providing some support to the wider economy. The improvement, however, was not sufficient to offset softer services activity, which dominates the UK private sector.

Business optimism rose to a seven-month high, but the survey’s chief business economist, Chris Williamson, warned that sluggish growth and elevated borrowing costs continued to present significant risks.

Pressure ahead of the Budget

The data arrive with Finance Minister John Healey preparing for his first Budget in October. Slower activity, subdued recruitment and renewed cost pressures leave the government facing a difficult trade-off between measures to support growth and the need to maintain fiscal credibility.

For companies, the combination of weak expansion and rising costs points to continued caution over investment and employment. For policymakers, the survey offers a warning that the economy has little momentum to absorb further shocks, particularly if energy prices remain elevated.