(March 24): British factories have been hit by the biggest pickup in inflationary pressures for more than three decades, as a raft of data on Tuesday showed the war in Iran feeding through into UK prices.
Input costs for the wider private sector rose at the fastest pace in more than three years in March, driven by fuel, transportation and energy-intensive raw materials, according to S&P Global’s purchasing managers index (PMI). Manufacturers suffered the sharpest acceleration in input cost inflation since Black Wednesday in 1992 when sterling plunged following its ejection from the European exchange rate mechanism.
While the PMI survey pointed to price pressures building in the pipeline, separate government data also showed an immediate impact for drivers.
Fuel costs rose sharply for a third straight week with petrol prices up 3.9 pence per litre to 144.16 pence — the highest since July 2024. Petrol prices have climbed 9% since early March.
As conflict persists in the Middle East, economists expect a resurgence in inflation that prompts households to tighten their belts and the Bank of England (BOE) to raise interest rates.
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“March’s flash PMIs show that the conflict in the Middle East is already going a long way to boosting inflation and extinguishing GDP (gross domestic product) growth,” said Paul Dales, the chief UK economist of Capital Economics. “We are a bit struck by how rapid the moves have been. This heightens the BOE’s dilemma.”
The UK central bank expects higher prices at petrol forecourts to boost inflation to 3.5% in March before consumers are hit by higher gas and electricity bills in the summer. Economists have warned inflation could climb towards 5% if the war drags on and moves in energy markets stick.
War has transformed the outlook for central bank policy with traders now expecting the BOE to hike interest rates as soon as next month to prevent a feedback loop in prices. Investors are fully pricing in two quarter-point hikes and a strong chance of a third by the end of the year after the Monetary Policy Committee said last week that it “stands ready to act” to contain inflation.
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The PMI also showed the war is already weighing on growth. The index dropped to a six-month low of 51 in March, down from 53.7 previously and much worse than the 52.8 expected by economists.
While the reading remained above the 50 threshold separating growth and contraction, the survey showed the impact of war in the Middle East rippling through supply chains and hitting customer demand.
Traders focused on slowing growth following the PMIs. The pound extended its decline against the dollar, falling 0.4% to 1.3380 while gilts were broadly steady leaving the UK 10-year yield at around 4.92%.
Economists have rushed to cut their projections for the UK economy in recent days, predicting that gross domestic product growth could halve this year as households tighten their belts and the BOE raises borrowing costs.
S&P said that the conflict was also already causing a decline in new work due to lower business and consumer confidence. Demand from overseas dwindled, resulting in the sharpest drop in new work from abroad for services.
Firms’ expectations for the year ahead weakened to the lowest for nine months with respondents blaming the war for the more downbeat outlook.
“The full impact on inflation and economic growth depends not just on the duration of the war but also the length of disruptions to energy markets and shipping,” said Chris Williamson, the chief business economist of S&P Global Market Intelligence. “March’s PMI numbers clearly underscore how downside growth risks and upside inflation risks have already materialised.”
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