UK braces for price rises driven by Iran war as economic confidence plummets

Confidence in the UK economy has fallen sharply amid the mounting economic fallout from the Iran war, surveys show, as businesses prepare to raise their prices and consumers brace for a fresh cost of living shock.

Highlighting the knock-on impact of the Middle East crisis in Britain, several closely-watched surveys of business activity and consumer confidence blamed the ongoing US-Israeli war on Iran for a marked deterioration in the outlook in April.

The latest barometer from the data company GfK showed UK consumer confidence slid in April to its lowest level since October 2023, while three separate business surveys revealed a surge in cost pressures facing companies and an expectation they would raise their prices over the coming months.

Neil Bellamy, consumer insights director at GfK, said soaring fuel prices and the prospect of higher energy costs were acting as a constant reminder to consumers of the inflationary shock from the war.

“Consumers really do have the jitters now,” he said.

The reading on GfK’s consumer confidence index, which has been used to gauge sentiment since 1974, fell by four points to -25.

“While the Gulf crisis is intensifying pressures, much of the current strain reflects earlier domestic cost increases. How long can all this disruption and pain continue?”

In a sign of the inflationary pressures building in Britain as the war rattles energy markets and disrupts global supply chains, the closely-watched S&P Global purchasing managers’ index showed UK service sector firms were hit with the biggest jump in costs since 1996 between March and April.

Prices also rose rapidly for raw materials in the manufacturing sector, while a separate survey by the CBI lobby group showed sentiment among UK industrial firms plunged at the fastest rate since the onset of the Covid pandemic.

Separately, the Office for National Statistics said more than a quarter of firms in its weekly survey of business conditions expected the price of goods or services they sell to increase next month, the highest since January 2023.

More than a third cited energy costs as a reason for considering price hikes. Four in 10 reported a rise in the cost of the goods or services they bought in March compared with February, the highest proportion since December 2022, while 15% reported an increase in the price of what they were selling, the highest proportion since April 2023.

Economists have warned that UK inflation is on track to rise sharply because of the worsening fallout from the Iran war, with the potential to force the Bank of England to raise interest rates.

Financial markets anticipate at least one increase in borrowing costs this year, although expect Threadneedle Street to keep interest rates on hold at its forthcoming policy meeting next Thursday amid heightened uncertainty over the war.

Chris Williamson, the chief business economist at S&P Global Market Intelligence, said: “Prices are rising not just because of surging energy costs, but also due to increases in charges levied for a wide variety of goods and services, with price hikes often stoked by supply concerns.”