British service sector activity grew slightly more than expected in May but companies raised prices at their weakest rate in more than a year, a survey showed on Tuesday.
The Chartered Institute for Purchasing and Supply/NTC index for activity in the services sector -- covering companies ranging from telecoms providers to cafes -- came in at 57.2, well above the 50 divide between expansion and contraction.
May's reading matched April's 7-month low and was just above expectations in a Reuters poll of 57.0.
The prices charged index fell to 52.5, the lowest since February 2006, from 53.9 in April, while firms' costs grew at their weakest pace this year with an index reading of 58.3, down from 58.6 in April.
Signs of easing price pressures may reinforce expectations the Bank of England will hold interest rates at 5.5% this week but most economists still expect the central bank to hike borrowing costs again in the next few months.
The BoE has already raised interest rates four times since last August in order to tame inflation, citing companies' increased pricing power as a key concern.
"The easing inflationary pressures shown by the Services PMI is in contrast to the trends shown in the manufacturing sector," said Andrew Grantham, economist at NTC.
NTC said strong competition had restricted firms' pricing power and over 80% of companies polled reported that output prices were unchanged from the previous month.
Still, companies also reported stronger demand.
The new business index picked up to a 4-month high at 57.6 and the employment index rose to a 3-month high of 54.1 as firms reported taking on more staff to cope with a higher workload.
But firms were less optimistic about their prospects 12 months ahead, with the business expectations index slipping to 72.0 from 75.3 in April, the weakest since last August.