By Wiktor Szary and Paul Hannon

LONDON--The U.K.'s services sector continued to expand in January, but the pace of growth slipped somewhat, suggesting the economy, while still on a solid footing, may be starting to lose some steam.

Financial information firm IHS Markit Ltd. said its purchasing managers index for the services industry, which accounts for some 80% of the U.K. economy, fell to 54.5 in January from 56.2 a month earlier. This was noticeably below the expectations of economists polled by The Wall Street Journal, who expected a reading of 55.8. The 50-point mark separates expansion from contraction.

The industry's strong performance helped the U.K. economy weather the storm of the June 23 vote, in which Britons voted to leave the European Union. Despite the referendum drama, the U.K. economy grew at the fastest rate among the Group of Seven advanced economies last year.

However, the softer services PMI data adds to "suspicion that the (...) economy will find life increasing difficult during 2017, and that growth will gradually lose buoyancy like a slow puncture," said Howard Archer, chief U.K. economist at IHS Global Insight.

Shortly after the PMI figures for services were published, the pound dropped slightly against the dollar, to $1.2477 from $1.2517. This was 0.24% below Thursday's close.

Many economists are cautious on 2017, arguing it will likely see consumer spending--one of the U.K. economy's key drivers--curbed by a sharp rise in inflation, fueled by the fall in sterling in the wake of the referendum.

Sterling's sharp devaluation pushed up companies' input price inflation as measured by the PMI survey to its highest levelsince March 2011, the data showed. This will "inevitably" end up squeezing consumers' wallets, IHS said.

Consumer prices grew 1.6% on the year in December, the fastest pace in over two years, and the Bank of England expects to overshoot its 2% inflation target by the second quarter of this year. Officials forecast inflation peaking at around 2.7% late next year before drifting gradually back to target.

Also in December, retail sales fell at the steepest rate in nearly five years, signaling Britons may already be starting to watch their pennies.

Jon Sindreu contributed to this article.

Write to Wiktor Szary at Wiktor.Szary@wsj.com and Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

February 03, 2017 06:26 ET (11:26 GMT)

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