Key Takeaways:
UK businesses expect to raise prices at the fastest pace in 15 months, a Bank of England survey showed Friday, threatening to prolong the central bank's battle against inflation as the Iran war drives up energy costs.
UK businesses expect to raise prices by 4 percent over the coming year, the fastest pace since February 2025, a Bank of England survey showed Friday, complicating the central bank's rate path as the Iran conflict pushes up energy costs.
"Several officials have expressed concern that corporate pricing power is proving stronger than expected as profit margins come under pressure," the BOE said in its Decision Maker Panel survey summary.
The reading, an average of the three months through May, was the highest since February last year, according to the survey. Wage growth expectations remained contained at 3.4 percent, unchanged from April's reading, as most wage settlements for 2026 have already been agreed at an average of around 3.5 percent.
The data deepens divisions within the Monetary Policy Committee ahead of the June 18 meeting. Megan Greene has indicated she may soon align with Chief Economist Huw Pill, the only member to vote for a rate increase since the Iran conflict began, while Governor Andrew Bailey has signaled no rush to raise rates given the weak economy.
The survey adds to evidence that the Iran war's inflationary shock is transmitting unevenly across the economy. While UK firms overall expect faster price increases, the ONS Business Insights and Conditions Survey showed only 20 percent of trading businesses expect to raise prices in June, down from 28 percent in May, suggesting smaller companies are more reluctant to pass on costs amid fragile consumer demand.
The divergence mirrors trends in the euro zone, where a Reuters analysis of 175 earnings calls found only a third of large companies were raising prices — a stark contrast to the two-thirds that did so after Russia's invasion of Ukraine in 2022. ECB policymaker Olli Rehn said the weaker backdrop should ease pressure on the European Central Bank to raise rates further.
Price expectations diverge by sector
Energy prices were the most commonly cited reason for considering higher prices, mentioned by 28 percent of UK businesses, though that was down from 34 percent in May. Labor costs were cited by 24 percent of businesses, while raw materials and transport costs were each mentioned by 21 percent, the ONS data showed.
The BOE's own agents survey found that pay data is not yet reflecting the impact of the Middle East conflict, as most wage settlements for 2026 have already been agreed. But the lag between energy price shocks and consumer inflation can take between two and 15 months to fully transmit through the economy, according to a study by the Bank of Finland.
For monetary policy, the mixed signals pose a challenge. If price expectations continue to rise, the BOE may need to resume rate increases — a scenario that would strengthen the pound but weigh on UK equities, particularly rate-sensitive sectors like real estate and consumer discretionary. If instead the pass-through proves limited, the central bank could maintain its current pause, supporting growth but risking entrenched inflation expectations.
The next test comes June 18, when the MPC announces its decision. OIS markets will be closely watched for how traders price the probability of a rate move.
This article is for informational purposes only and does not constitute investment advice.
