By Jason Douglas

LONDON--Activity in Britain' services sector grew in December at the fastest pace in more than a year, buoyed by healthy demand at home and a boost to exports from a weak pound.

The data add to signs that the U.K. economy ended 2016 on a strong footing, further defying expectations of a post-Brexit slowdown. But many economists warn growth is set to ease off in 2017 as accelerating inflation squeezes consumers' wallets and uncertainty over the U.K.'s future ties to the European Union weighs on business investment.

Meanwhile, global economic prospects look uncertain, following Donald Trump's victory in the U.S. presidential vote in November and looming elections in France and Germany.Andrew Haldane, the Bank of England's chief economist, said Thursday there appeared to be a disconnect between policy makers' caution on growth and the more upbeat view displayed by investors, who have in recent weeks driven global stock markets higher.

"At some point these two parallel universes need to come together," Mr. Haldane said--adding that it wasn't clear how the global economy would take this reckoning.

Financial information firm IHS Markit Ltd. said its purchasing managers index for the services sector rose to 56.2 in December from 55.2 a month earlier, marking the fastest pace of growth since July 2015.

The expansion in services, which account for almost 80% of the U.K.'s annual output, was driven by new product launches, marketing efforts and bumper exports, which have benefited from a slide in sterling since Britain voted to leave the EU in June.

Similar gauges of activity for manufacturing and construction also recorded gains in December, suggesting the British economy is set for another quarter of healthy growth in the final three months of the year.

The economy's strength has confounded widespread predictions of a sharp slowdown in the aftermath of June's referendum. Prime Minister Theresa May has said she would give Brussels formal notice of the U.K.'s intention to withdraw by the end of March and is due early this year to sketch out more detail on her objectives in coming Brexit negotiations, scheduled to last at least two years.

Economists say the economy's recent strength may not last, however, as sterling's decline is fueling a revival in inflation that is expected to hurt consumer spending. Thursday's survey found cost pressures for firms rose in December at a rate close to November's five-year high.

The Bank of England, which cut its benchmark interest rate in August to cushion the economy from any Brexit-related jitters, has said it expects annual inflation to overshoot its 2% goal in the first half of the year.

Mr. Haldane said Thursday he expected consumers to "throttle back" spending in the coming months as quickening price increases started to bite.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

January 05, 2017 11:28 ET (16:28 GMT)

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