The most severe moment since "Black Wednesday"! Spillover effects of Iran conflict show; UK manufacturing inflation hits 34-year peak.

The UK manufacturing industry is facing the most severe inflation pressure in over thirty years. Multiple data released on Tuesday show that the impact of the Iran conflict has transmitted to the UK price system. The S&P Global Purchasing Managers' Index (PMI) shows that driven by the rising prices of fuel, transportation, and high-energy raw materials, the overall input costs of private enterprises in the UK reached the fastest growth rate in over three years in March, with the input cost inflation rate of manufacturing enterprises sharply rising, reaching the highest level since the "Black Wednesday" of 1992--when the pound suffered a significant drop after being forced to exit the European Exchange Rate Mechanism. PMI surveys show that price pressures are accumulating in the supply chain, and another official data already shows a direct impact on people's travel. UK fuel prices have risen significantly for the third consecutive week, with gasoline prices rising by 3.9 pence per liter to 144.16 pence, reaching a new high since July 2024; since early March, gasoline prices have risen by a cumulative 9%. As the Middle East conflict continues, economists expect inflation to rise again, forcing households to tighten their spending and possibly prompting the Bank of England to raise interest rates. Paul Dales, Chief UK Economist at Capital Economics, said: "The preliminary March PMI indicates that the Middle East conflict has significantly pushed up inflation and suppressed GDP growth. Such a rapid trend has surprised us, exacerbating the policy dilemma of the Bank of England." The Bank of England expects that the rise in gasoline prices will push the March inflation rate to 3.5%, and consumers will face further impacts from increases in gas and electricity prices this summer. Economists warn that if the conflict continues and energy market volatility increases, the UK inflation rate may approach 5%. The conflict in Iran has fundamentally changed the policy outlook for the Bank of England. Traders currently expect the Bank of England to raise interest rates as soon as next month to prevent the risk of spiraling price increases. After the Monetary Policy Committee of the Bank of England stated last week that it is "prepared to take action" to curb inflation, the market has fully priced in two 25-basis-point rate hikes this year, and the probability of implementing a third rate hike by the end of the year is high. The PMI data also show that the conflict has begun to drag down economic growth. The composite PMI for March fell from 53.7 to 51, hitting a six-month low, well below economists' expectations of 52.8. Although the index remains above the boom-bust line of 50, the survey shows that the impact of the Middle East conflict is spreading along the supply chain, while also affecting market demand. Following the release of the PMI data, traders are focused on signals of slowing economic growth. The pound continued its decline against the dollar, while UK government bonds stabilized overall, with the 10-year government bond yield at around 4.92%. Recently, economists have been lowering their expectations for UK economic growth. With consumers cutting back on spending and the central bank raising borrowing costs, it is expected that the UK's GDP growth rate for this year will be halved. S&P Global points out that due to the decline in business and consumer confidence, the conflict has led to a reduction in new orders; overseas demand continues to shrink, and there has been a significant decline in new business volumes for the service industry overseas. Companies' expectations for the next year have fallen to a nine-month low, with surveyed companies all citing this conflict as the main reason for the dimming outlook. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: "The comprehensive impact of the conflict on inflation and economic growth depends not only on the duration of the conflict but also on the length of time that the energy market and shipping are disrupted. The PMI data in March clearly confirms that the downside risks to economic growth and the upside risks to inflation have become a reality."