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LONDON (Reuters) - Growth in Britain's services sector slowed for the first time in four months in January as businesses battled the sharpest rise in their costs in more than five years, a closely watched survey showed on Friday.
Britain's economy outpaced its main peers last year, wrong-footing those who expected a rapid hit from June's Brexit vote. But Friday's data offered signs that a limited slowdown might be taking place.
The Markit/CIPS services purchasing managers' index (PMI) dropped to 54.5 from December's 15-month high of 56.2, just below its long-run average and at the bottom end of a range of forecasts in a Reuters poll of economists.
Combined with drops in manufacturing and construction PMIs this week, the survey was consistent with quarterly growth slowing to 0.5 percent in early 2017 from 0.6 percent at the end of last year, Markit said, in line with the Bank of England's relatively upbeat growth forecasts released on Thursday.
Nonetheless, sterling dropped almost half a cent against the U.S. dollar after the PMI was published, extending its hefty falls on Thursday when BoE Governor Mark Carney gave no hint that interest rates were likely to rise soon.
Samuel Tombs, an economist at Pantheon Macroeconomics, said he believed the survey overstated growth for the economy as a whole, as it did not include retailers likely to be hit hardest by rising prices.
"Momentum is fading as prices shoot up," he said.
Services firms said their costs were rising at the fastest since March 2011 due to sterling's fall since the referendum.
"Anecdotal evidence widely attributed cost pressure to fuel, salaries, freight charges and imports," Markit said.
In turn, businesses further raised the prices they charged which were the most widespread since April 2011.
"The degree to which costs are rising threatens to test the tolerance of some policymakers in terms of their willingness to 'look through' what's likely to be a marked upturn in inflation in 2017," IHS Markit economist Chris Williamson said.
Markit said optimism among businesses in its survey rose to its highest since May last year, helped by new orders, products and markets, as well as continued low interest rates and a bit more clarity about Britain's exit from the European Union.
Britain's parliament gave Prime Minister Theresa May an initial green light to start Brexit talks earlier this week.
Editing by Tom Heneghan