The UK manufacturing sector is experiencing its most intense inflationary pressure in over three decades. Data released on Tuesday indicates that the impact of the Iran conflict has now transmitted into the UK's price system. According to the S&P Global Purchasing Managers' Index (PMI), driven by rising costs for fuel, transportation, and energy-intensive raw materials, overall input costs for UK private sector firms rose at their fastest pace in over three years in March. Notably, the rate of input cost inflation for manufacturing firms accelerated sharply, marking the largest increase since the 1992 "Black Wednesday" crisis, when the pound sterling crashed dramatically after being forced out of the European Exchange Rate Mechanism.

The PMI survey reveals that price pressures are building across supply chains. Meanwhile, separate official data directly illustrates the impact on the public. UK fuel prices rose significantly for the third consecutive week, with petrol prices increasing by 3.9 pence per liter to 144.16 pence, reaching their highest level since July 2024. Since the beginning of March, petrol prices have accumulated a 9% increase.

As the Middle East conflict persists, economists anticipate a resurgence of inflation, which is expected to force households to tighten their spending and could prompt the Bank of England to raise interest rates. Paul Dales, Chief UK Economist at Capital Economics, stated, "The preliminary PMI readings for March suggest the Middle East conflict has significantly boosted inflation and dampened GDP growth. The sheer speed of this shift is quite startling and worsens the policy dilemma for the Bank of England."

The Bank of England projects that rising petrol prices will push the inflation rate to 3.5% in March. Furthermore, consumers are expected to face additional shocks from increases in gas and electricity bills this summer. Economists warn that if the conflict continues and energy market volatility intensifies, the UK's inflation rate could approach 5%.

The Iran conflict has fundamentally altered the central bank's policy outlook. Traders now anticipate that the Bank of England could raise interest rates as soon as next month to curb the risk of a spiraling price increase. Following the Monetary Policy Committee's statement last week that it "stands ready to take action" to contain inflation, markets have fully priced in two 25-basis-point rate hikes for this year, with a high probability of a third hike before year-end.

Concurrently, the PMI data indicates that the conflict is beginning to weigh on economic growth. The composite PMI for March fell to 51 from the previous 53.7, hitting a six-month low and falling significantly short of economists' expectations of 52.8. Although the index remains above the 50-point threshold separating expansion from contraction, the survey indicates that the impact of the Middle East conflict is transmitting through supply chains while also dampening market demand.

Following the PMI release, traders focused on signals of slowing growth. The British pound extended its decline against the US dollar, while UK government bonds broadly stabilized, with the 10-year gilt yield around 4.92%.

Economists have recently been downgrading UK growth forecasts. As households cut spending and the central bank raises borrowing costs, the UK's GDP growth for this year is expected to be roughly halved. S&P Global noted that the conflict has led to a reduction in new orders due to declining business and consumer confidence. Overseas demand continues to shrink, with new export business in the services sector experiencing a particularly sharp decline. Business expectations for the year ahead dropped to a nine-month low, with surveyed firms citing the conflict as the primary reason for the deteriorating outlook.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented, "The full impact of the conflict on inflation and growth depends not only on the duration of hostilities but also on the persistence of energy market disruptions and shipping constraints. The March PMI data clearly confirms that both downside risks to growth and upside risks to inflation have materialized."