Business volumes in the services sector expanded at a steady pace in the three months to August. However, strong cost pressures hit profitability.

The business and professional services sector - which includes accountancy, legal and marketing firms - saw growth in business volumes ease and the pace is set to slow further in the three months to November, according to the latest quarterly CBI Services Sector Survey.

However, after a sharp decline in the three months to May, business volumes picked up a little in the consumer services sector - which includes hotels, bars, restaurants, travel and leisure firms. Demand for consumer services is expected to increase a little further next quarter.

Other indicators painted a mixed picture. Profitability in both sub-sectors failed to improve, being flat for business and professional services and falling for a second successive quarter in consumer services.

Cost pressures remained elevated in both sub-sectors, with costs growth in business and professional services edging higher and remaining far above average in consumer services, despite easing last quarter.

Rising costs continue to feed into selling prices with heightened inflation in both sub-sectors. Next quarter, prices are expected to remain stable in business and professional services, but to rise at an accelerating rate in consumer services.

Sentiment in the services sector varied, with business & professional services firms' optimism about the general business situation falling at the fastest pace since November 2016, while consumer services saw a modest improvement in sentiment.

The trend is similar for plans for business expansion with consumer services slightly more optimistic about their prospects in the year ahead compared with three months ago, whilst business & professional services firms are neutral about their outlook.

Nevertheless, employment growth remained robust in both sub-sectors, with similar levels of growth expected in the quarter ahead.

The broader economic outlook remains fairly subdued, with UK GDP growth held back by weak household income growth and the impact of Brexit uncertainty on investment.

Rain Newton-Smith, CBI chief economist, said: "Although consumer services growth inched up last quarter, overall services sector growth was fairly muted. And with cost pressures rising, services firms are not seeing any improvement in their bottom lines.

"The underlying challenges facing the sector are not going away any time soon. Demand growth is expected to remain subdued next quarter and firms seem hesitant over the prospects for expanding their businesses in the year ahead. They still plan to take on new workers next quarter, but the confidence to invest significantly more is lacking.

"Above all, the Government and Brussels need to get on with finalising a Withdrawal Agreement, putting pen put to paper on a jobs-first transition period and finally, agreeing a new relationship between the UK and the EU that puts people's livelihoods above politics."