UK Construction and Services Face Cost Surge as Iran War Hits Supply Chains
UK businesses are facing the sharpest rise in costs in nearly four years as the conflict in the Middle East disrupts supply chains and pushes up energy and raw material prices. Data released in May 2026 shows construction and services sectors reporting the steepest input cost inflation since late 2022.
The impact is already visible in business activity, with construction output falling sharply and hiring slowing across multiple sectors. For UK SMEs and consumers, the trend means higher prices and tighter margins in the months ahead.
Construction PMI Drops to 39.7 in April
The S&P Global UK Construction Purchasing Managers’ Index fell to 39.7 in April 2026, down from 45.6 in March. Any reading below 50 signals contraction, and April’s drop was the weakest since November 2025.
Input cost inflation jumped to 81.4, its highest level since June 2022. According to S&P Global, this was the second-biggest monthly increase since the survey began in 1997. Around 69% of firms reported higher costs, driven by fuel, steel, and electrical components.
Tim Moore, economics director at S&P Global Market Intelligence, said the rise in purchasing costs was the steepest in three decades outside the post-pandemic period. Delivery delays also worsened as vessels struggled to pass through the Strait of Hormuz.
Services Sector Feels the Squeeze
The services sector saw a similar pattern. The S&P Global Services PMI rose to 52.7 in April, indicating modest growth, but input cost inflation hit its highest level since November 2022.
Firms cited higher transport costs and wage pressures as the main drivers. More than half of service providers reported an increase in average cost burdens. Businesses passed some of these costs to customers, with prices charged rising at the fastest pace in over three years.
Business sentiment remained cautious. While output recovered slightly from March, new business intakes stayed weak compared to early 2026.
Housing Market Cools as Borrowing Costs Rise
The housing market is also feeling the strain. Halifax data showed UK house prices fell 0.1% in April and were only 0.4% higher than a year earlier. Annual growth slowed from 0.8% in March.
Higher energy prices have pushed up inflation expectations, leading markets to reassess the path for interest rates. Mortgage rates have already risen, reducing affordability for many buyers.
The Bank of England held rates at 3.75% in early May but warned that further hikes remain possible if inflation from the Middle East conflict persists.
Gilts Hit 28-Year High After Election Losses
UK government borrowing costs are near their highest level since 1998. Thirty-year gilt yields reached 5.63% on May 9, driven by concerns over fiscal stability after Labour’s heavy losses in local elections.
Investors worry that political uncertainty could lead to looser fiscal policy or a change in leadership. Memories of the 2022 gilt market meltdown under Liz Truss are keeping bond markets cautious.
Higher borrowing costs increase pressure on SMEs and reduce the government’s fiscal headroom for spending and investment.
What It Means for UK Businesses and Consumers
The combination of rising costs, weaker demand, and political uncertainty is creating a challenging environment for UK firms. Construction, retail, and hospitality are most exposed to payment delays and insolvency risk.
For consumers, higher input costs are likely to feed into retail prices for food, fuel, and services. Wage growth may not keep pace, squeezing household budgets further.
The Bank of England will watch closely whether the inflation impulse proves temporary or requires further monetary tightening.
Outlook for the Rest of 2026
Economists expect cost pressures to remain elevated while the Middle East conflict continues. If energy prices stabilize, inflation could ease in the second half of the year.
However, with construction activity contracting and business confidence low, the risk of a deeper slowdown has increased. Companies are being advised to tighten credit management and monitor customer payment behavior closely.