How UK Firms Are Responding to the War in Iran: Early Evidence From the Decision Maker Panel

Why It Matters

Higher price pass‑through and compressed margins signal upward pressure on UK inflation, challenging the Bank of England’s target, while muted wage expectations may limit a wage‑price spiral.

Key Takeaways

• Energy costs rose to 6% of total, up from 4% in 2019.
• 60% of firms plan price hikes; 62% expect margin compression.
• High‑energy firms see 68% price increase, 78% margin decline.
• One‑year CPI expectations rose to 4.0%, up from 2.9%.
• Wage growth expectations stay near 3.5%, showing little shock pass‑through.

Pulse Analysis

The recent escalation of the Iran conflict has reignited concerns about energy‑price volatility in the United Kingdom. While the war itself is geographically distant, the resulting spike in global oil and gas markets has pushed UK firms’ energy bills from roughly 4% of total costs in 2019 to about 6% today. This mirrors the 2022 energy crisis, but the speed of the current shock—combined with a higher baseline of energy consumption—means the Bank of England must reassess its inflation outlook sooner rather than later. Early data from the Decision Maker Panel suggest that firms are already factoring the higher costs into their pricing strategies, nudging near‑term CPI forecasts upward.

Firm‑level responses reveal a classic two‑track adjustment: price pass‑through and margin erosion. About 60% of surveyed companies intend to raise output prices, while a similar share anticipates tighter profit margins, especially those whose energy share exceeds 5% of total costs. Hedging activity provides a temporary buffer—two‑thirds of firms have fixed electricity rates and half have hedged gas—but most contracts lapse within six months, foreshadowing renewed exposure. Sectoral analysis shows that energy‑intensive industries such as transport, manufacturing, and accommodation are the most likely to transmit costs to customers, whereas information services and professional firms expect limited price changes.

For policymakers, the key question is whether these early price adjustments will trigger a second‑round effect in wages and broader inflation. So far, wage‑growth expectations remain anchored around 3.5%, suggesting limited bargaining pressure. However, if higher input costs persist and profit margins continue to shrink, firms may eventually concede to wage demands, reigniting a wage‑price spiral. Continuous monitoring of the Decision Maker Panel, alongside labour‑market data and real‑time price indices, will be essential for the Bank of England to calibrate monetary policy and avoid entrenched inflationary dynamics.