As the Bank of England's interest-setting committee started its two-day monthly meeting to fix interest rates yesterday, news came that service companies were recruiting new staff in June faster than at any time for nearly eight years - and paying higher salaries to attract people.

This was the seventh month running that the service economy survey by the Chartered Institute of Purchasing and Supply and the Royal Bank of Scotland has reported rising employment to cope with backlogs of work created by a strong flow of incoming orders.

The CIPS' headline business activity index for services eased slightly to 58.7 from 59.2 in May on a scale where anything over 50 indicates growth.

But the sub-indices for both employment and input costs facing service providers were both higher than in May. That for costs - taking account of higher wage bills as well as energy and fuel bills - rose to 61.9, pointing to the strongest cost inflation for 19 months.

That was well ahead of an index number of 54.2 tracking output prices charged to customers, but many companies contributing to the survey - led by hotels and restaurants - said they retained a reasonable degree of pricing power and were able to pass on their higher operating costs.

Roy Ayliffe, director of professional practice at the CIPS, said: "The performance of the UK services sector was marked by rapid expansion in June as employment hit an eight-year-high, according to purchasing managers.

"The sector has now seen 39 months of overall growth, driven by steady increases in new business for more than three years.

"Soaring input costs again caused problems for UK service providers, however, and led to lessening degrees of confidence about the future."

The index number for business expectations was still a buoyant 73.1, nevertheless. But it was down from 74.7 in May and the lowest reading for three months."

Some members of the CIPS panel expressed fears that their success could lead to an interest rate increase.

There was no sign of this rising inflation in the shops, though, which do not feature in the CIPS services survey.

The British Retail Consortium reported that shop prices last month were 0.02 per cent lower than in June last year, although this was smaller than a 0.48 per cent decrease in May.

Between May and June, shop prices rose by a marginal 0.01 per cent, driven entirely by food prices, which have now risen in four of the past six months.

Prices of non-food items fell by 0.1 per cent last month after rising slightly in May.

"Price deflation is continuing apace and, as retailers vie for sales, competition within the sector is increasing," said Kevin Hawkins, the BRC's director general.

"Whilst this is good news for the consumer, the continued discounting and promotional activity is coming at a cost to retailers' margins and any growth in the market is being driven by lower prices.

"With cost inflation adding to retailers' woes, they hope the (Bank's committee) again make the right decision and keep rates on hold. Any increase now will have a detrimental effect on the sector and could break the already fragile confidence of many consumers."