UK factory costs have surged at their fastest rate since the aftermath of the Black Wednesday, as rising energy prices linked to the Middle East conflict ripple through the economy and threaten to reignite inflation.
Fresh data from S&P Global shows that production costs in British manufacturing accelerated sharply in March, while overall private sector growth slowed to what economists described as “a crawl”.
The figures, drawn from the closely watched Purchasing Managers’ Index (PMI), point to a rapid deterioration in business conditions, driven by soaring oil and gas prices, disrupted supply chains and weakening demand.
The spike in costs has been directly linked to the surge in global energy prices following the escalation of conflict in the Middle East. The effective closure of key shipping routes such as the Strait of Hormuz has constrained supply, pushing up prices for fuel and raw materials used across manufacturing and food production.
The manufacturing input prices index jumped to 70
2 in March from 56 the previous month, its highest level since late 2022 and the steepest increase since October 1992, the month following Black Wednesday, when the pound’s collapse drove up the cost of imports.
Brent crude oil prices have risen by more than 40 per cent since late February, reaching around $100 a barrel, adding significant cost pressure to energy-intensive industries.
At the same time, the broader UK economy is losing momentum. The composite PMI, which measures activity across manufacturing and services, fell to 51 in March, down from 53.7 in February and below analysts’ expectations.
While still above the 50 threshold that separates growth from contraction, the figure represents a six-month low and signals a marked slowdown.
Both key sectors showed weakening performance
The manufacturing PMI edged down to 51.4, while services activity, a major driver of the UK economy, dropped more sharply to 51.2 from 53.9.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said companies were increasingly attributing lost business directly to the fallout from the Middle East conflict.
“Output growth has slowed to a crawl as firms face heightened risk aversion among customers, rising costs, higher interest rates and ongoing supply chain disruption,” he said.
The rapid increase in input costs is feeding concerns that the UK could face a renewed inflation surge, potentially pushing consumer price growth above 5 per cent later this year if energy prices remain elevated.
Economists warn that the speed of the shift has been particularly striking
Paul Dales of Capital Economics said the scale and pace of the changes had surprised analysts, even given the expected impact of an energy shock.
The PMI data is often seen as an early indicator of official inflation figures, which are produced by the Office for National Statistics. While inflation is expected to remain around 3 per cent in the short term, the Bank of England has already signalled it could rise further in the coming months.
Financial markets have responded by revising expectations for monetary policy, with traders now anticipating multiple interest rate increases this year from the current level of 3.75 per cent.
Higher borrowing costs would place additional strain on businesses and households, further dampening economic activity and complicating the government’s efforts to support growth.
Business sentiment has already weakened, falling to a nine-month low, while companies have continued to cut jobs amid uncertainty.
The UK is not alone in facing these pressures. Similar PMI data shows activity slowing in both the United States and the eurozone, suggesting the energy shock is having a broad global impact.
Pantheon Macroeconomics estimates that the UK economy may grow by just 0.1 per cent in the first quarter of the year, underscoring the fragile state of the recovery.
The combination of rising costs, slowing demand and tightening financial conditions presents a difficult outlook for the UK economy.
With energy prices driving inflation higher and limiting room for fiscal support, policymakers face a narrowing set of options.
For businesses, the immediate challenge is managing cost pressures without eroding competitiveness. For households, the risk is a renewed squeeze on living standards.
And for the economy as a whole, the latest data suggests a familiar and uncomfortable scenario may be emerging, one where weak growth and rising prices collide.
