Inflation expectations among UK businesses have climbed to their highest level in more than two years, as the ongoing conflict in the Middle East drives up energy costs and reshapes economic forecasts.
Data from the Bank of England shows firms now expect inflation to reach 3.5 per cent over the next 12 months, up from 3 per cent previously, marking the highest year-ahead projection since late 2023. The shift comes after oil and gas prices surged following disruptions to global supply routes linked to the Iran conflict, leaving companies bracing for more sustained cost pressures.
The rise in inflation expectations has affected firms’ views on interest rates. Businesses now anticipate only one Bank of England rate cut in the next year, compared with earlier expectations of multiple reductions, and foresee just two by 2029. Persistent inflation is limiting the scope for monetary easing, as energy prices continue to hover above $100 a barrel.
These pressures are already influencing corporate behaviour. Companies expect to raise prices by an average of 3.7 per cent over the coming year, up from 3.4 per cent in February. Industry groups have warned that grocery prices could climb by as much as 9 per cent by year-end, while household energy bills are projected to increase sharply when the next Ofgem price cap is applied.
The data also points to a cautious labour market outlook. Businesses now predict a slight decline in employment over the next year, reversing previous expectations for growth. Wage growth is expected to ease slightly to 3.4 per cent, suggesting firms may be reluctant or unable to fully offset rising costs for workers. Economists warn that this combination of higher prices and modest pay rises could squeeze real incomes, affecting consumer spending and overall economic activity.
The UK economy is already experiencing fragile growth. GDP expanded by just 0.1 per cent in the final quarter of last year, and the OECD recently forecast that the country could face the slowest growth and highest inflation among G7 nations due to the conflict. Rising borrowing costs, including elevated government bond yields, are adding further pressure on businesses, reflecting investor concerns about inflation and fiscal constraints.
Domestic factors are compounding global shocks. Increases in the minimum wage and higher business rates are adding to costs for firms already operating with tight margins. Analysts say the surge in energy prices is influencing hiring decisions and driving companies to adjust pricing strategies to protect margins.
Elliott Jordan-Doak of Pantheon Macroeconomics said, “Higher costs are weighing on hiring plans and leading to increased price-setting intentions,” though he noted that medium-term expectations remain relatively stable.
For the Bank of England, balancing inflation control with the risk of slowing growth remains a key challenge. For businesses and households, the impact is immediate, with rising costs, tighter financial conditions, and growing uncertainty expected to shape the UK economy in the months ahead.