UK businesses are poised to implement more substantial price increases in the coming year, directly attributing these adjustments to a surge in energy costs exacerbated by the Middle East conflict. Findings from a recent Bank of England (BOE) survey indicate a notable uptick in firms’ price expectations, signaling a potential re-acceleration of inflationary pressures.
According to the BOE’s Decision Maker Panel survey, firms questioned in March anticipate raising their prices by 3.7% over the next 12 months. This figure represents an increase from 3.4% reported in February and marks the highest expected rise since October. Concurrently, businesses also projected overall consumer prices to climb by 3.5%, up from an anticipated 3% the previous month.
Energy Costs Fueling Price Adjustments
The central bank explicitly stated that this pickup is ‘pointing to firms adjusting their expectations as a result of the recent increases in energy prices.’ The survey’s polling period, which ran from March 6 to March 20, commenced approximately a week after the US and Israel initiated attacks on Iran. The ongoing conflict, particularly the continued closure of the Strait of Hormuz—a critical energy thoroughfare—is inflicting pain on economies globally, contributing to the elevated energy costs.
With 2,004 responses collected, the data underscores building inflationary pressures. This presents a complex challenge for BOE policymakers, who are currently weighing the potential knock-on effects on prices and wages against the broader threat to economic growth and employment. Bank of England Governor Andrew Bailey, in an interview conducted on Wednesday, expressed his belief that companies possess ‘only limited power to pass on higher costs,’ suggesting a cautious outlook on the extent of price transmission.
Wage Expectations Ease Amidst Uncertainty
Despite the upward revision in price expectations, the Decision Maker Panel survey revealed some contrasting trends in other key business metrics. Wage expectations, for instance, eased by 0.1 points to 3.4%. This represents the lowest figure recorded since the BOE began collecting this specific data in 2022. Furthermore, employment plans among firms deteriorated, indicating a more cautious approach to hiring.
The survey also highlighted a significant increase in business uncertainty. A substantial 57% of firms reported that the overall level of uncertainty facing their business was high or very high, marking a 10 percentage point increase from February. Uncertainty surrounding year-ahead prices also saw an increase, reflecting the volatile economic environment and geopolitical tensions.
The latest survey results paint a picture of UK businesses grappling with heightened energy costs and a complex geopolitical landscape, leading to a clear intention to pass on these expenses. While wage growth expectations show some moderation, the overall inflationary outlook remains a critical concern for the Bank of England as it navigates its monetary policy decisions in the coming months.
