Businesses have recorded the highest level of cost inflation since the aftermath of Liz Truss’ mini-Budget, as the ongoing Iran conflict continues to impact the economy. The rapid increase in raw material prices has led to a surge in costs for the manufacturing sector, with the crucial UK services sector — contributing over 80% to GDP — experiencing the most significant impact.
The latest Flash Purchasing Manager’s Index (PMI) from S&P Global indicates that soaring fuel prices have caused the services sector to experience its largest acceleration in cost inflation since records began in July 1996. This follows a peak in oil prices, reaching $118, during the US-Israel conflict with Iran, which disrupted traffic through the Strait of Hormuz, a critical chokepoint for global oil supply.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that prices have increased at an unprecedented rate outside of the pandemic, suggesting a potential rise in inflation beyond many forecasts. He further explained that the price hikes are driven not only by energy costs but also by increased charges for various goods and services, often exacerbated by supply concerns.
Job losses in the private sector have persisted for the nineteenth consecutive month. Earlier this month, Rachel Reeves introduced a support package aimed at reducing energy costs for businesses, promising up to a 25% reduction in bills. However, the scheme will not be operational until next year, although the Chancellor has assured that support will be backdated to this month.
Despite these challenges, the headline PMI showed a reading of 52.0, up from 50.3, remaining above the neutral 50.0 mark, indicating sector growth. This exceeded analysts’ expectations of a 49.8 reading for the month. The UK economy has regained some momentum in April after the initial impact of the Middle East conflict caused a slowdown in March. However, this upturn is partly attributed to a short-term boost from a rush to secure purchases ahead of anticipated price increases and supply shortages linked to the conflict.
Business confidence has been adversely affected by rising tensions, with the PMI reporting higher transportation costs and low confidence among businesses and consumers due to demand constraints. While private sector employment numbers continue to decline, they have done so at the slowest rate since October 2025. The report highlights that reduced payroll numbers partly reflect a lack of pressure on business capacity, as indicated by the sharpest decline in backlogs of work in five months.
