"Black Wednesday" since the most severe moment! Iran conflict spillover effects emerge, UK manufacturing inflation pressure hits 34-year peak

The Caixin Finance APP has learned that the UK manufacturing sector is experiencing the most severe inflationary pressure in over 30 years. Multiple data released on Tuesday indicate that the impact of the Iran conflict has been transmitted to the UK price system.

The S&P Global Purchasing Managers’ Index (PMI) shows that driven by rising fuel, transportation, and high-energy raw material prices, the overall input costs for UK private companies in March increased at the fastest rate in more than three years, with manufacturing companies experiencing an even sharper inflation in input costs—the fastest since “Black Wednesday” in 1992, when the pound was forced out of the European Exchange Rate Mechanism and plummeted.

The PMI survey indicates that price pressures are accumulating along the supply chain, while another official data point directly reflects the impact on public travel. Fuel prices in the UK have risen sharply for the third consecutive week, with petrol prices up 3.9 pence per liter to 144.16 pence, reaching a new high since July 2024; since early March, petrol prices have increased by a total of 9%.

As the Middle East conflict persists, economists expect inflation to rise again, which will force households to tighten spending and may prompt the Bank of England to raise interest rates.

Paul Dales, Chief UK Economist at Capital Economics, said: “The preliminary PMI for March indicates that the Middle East conflict has largely driven up inflation and suppressed GDP growth. The rapid pace of this change has surprised us, increasing the policy dilemma for the Bank of England.”

The Bank of England expects that rising petrol prices will push the March inflation rate up to 3.5%, and consumers will face further increases in gas and electricity costs this summer. Economists warn that if the conflict continues and energy market volatility intensifies, UK inflation could approach 5%.

The Iran conflict has fundamentally changed the outlook for central bank policy. Traders currently expect the Bank of England to raise interest rates as early as next month to prevent a spiral in prices. After the Monetary Policy Committee stated last week that it is “ready to act” to curb inflation, markets have fully priced in two 25 basis point rate hikes this year, with a high probability of a third hike before year-end.

PMI data also show that the conflict has begun to drag on economic growth. The composite PMI for March fell from 53.7 to 51, hitting a six-month low and well below economists’ forecast of 52.8.

Although the index remains above the 50 mark indicating expansion, the survey indicates that the impact of the Middle East conflict is being transmitted along the supply chain and is affecting market demand.

Following the PMI release, traders focused on signals of slowing economic growth. The pound continued to decline against the dollar, while UK government bonds stabilized overall, with the 10-year bond yield around 4.92%.

Recently, economists have lowered UK economic growth forecasts. With households reducing spending and the central bank raising borrowing costs, UK GDP growth this year is expected to be halved.

S&P Global pointed out that, due to declining business and consumer confidence, the conflict has led to a decrease in new orders; overseas demand continues to shrink, and new business volume in the service sector abroad has fallen sharply.

Business expectations for the next year have dropped to a nine-month low, with surveyed companies citing the conflict as the main reason for their more cautious outlook.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The full impact of the conflict on inflation and economic growth depends not only on the duration of the hostilities but also on how long energy markets and shipping are disrupted. The March PMI data clearly confirm that both downside risks to economic growth and upside risks to inflation are now realities.”

(Editors: Wang Zhiqiang HF013)

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