UK businesses are preparing to raise prices at the fastest pace in almost two years as they respond to soaring energy costs triggered by the Iran war, a Bank of England (BoE) survey released on Thursday. The survey highlights firms’ intentions to reduce staffing levels and slow wage growth compared to previous expectations.
The BoE is closely monitoring corporate pricing strategies to assess how much of the recent energy price spike, linked to the conflict in Iran, will be passed on to consumers, potentially fueling inflation. The monthly Decision Maker Panel, conducted in March, showed that companies expect to increase prices by an average of 3.7% over the next 12 months. This marks the highest anticipated price rise since October and represents a significant jump from the 3.4% forecast in February, before the conflict began. It is also the largest month-to-month increase since April 2024.
BoE Governor Andrew Bailey noted in a recent interview that while firms have limited ability to fully transfer cost increases to customers, some pass-through of higher energy expenses is expected. Meanwhile, projected wage growth for the year ahead declined to 3.5% on a three-month moving average in March and 3.4% on a monthly basis, both the lowest levels recorded since the series began in 2022.
In addition to pricing and wage adjustments, companies anticipate a reduction in employment, with average staffing levels expected to decrease by 0.3% over the coming year. This contrasts with the 0.3% increase firms predicted in February. Businesses also foresee consumer price inflation reaching 3.5% over the next year, the highest since December 2023 and a 0.5 percentage point rise from February. This represents the most substantial monthly increase since September 2022.
Elliott Jordan-Doak, senior economist at Pantheon Macroeconomics, commented that while some more dovish members of the Monetary Policy Committee might view this inflation uptick as temporary and driven by recent events, the overall rise in household inflation expectations remains a significant concern. The risk of second-round inflation effects continues to weigh heavily on policymakers.
Britain’s headline inflation rate held steady at 3.0% in February and was expected to approach the BoE’s 2% target by April before the Middle East conflict escalated. However, the central bank now projects inflation to climb toward 3.5% by mid-year. Reflecting these developments, investors increased their bets on interest rate hikes, fully pricing in two quarter-point increases by the BoE this year.
The survey, conducted between March 6 and 20 following the US-Israeli attacks on Iran starting February 28, gathered responses from 2,004 firms, providing a comprehensive snapshot of business expectations amid geopolitical tensions and economic pressures.
