The conflict in the Middle East has pushed energy prices sharply higher, but the implications for UK inflation will depend on the shock’s scale, duration, and propagation through firms’ costs, prices, margins, and wages. The Bank of England’s near-term CPI inflation forecast was materially higher in the April 2026 Monetary Policy Report compared with the February 2026 forecast, largely due to the direct effect of higher energy costs (Bank of England 2026a). The latest Report also notes risks of second-round effects in price and wage-setting, which may emerge as the shock passes through the economy. How exposed are UK firms to rising energy costs, and how do they expect to adjust? Past research has highlighted that businesses adjust along multiple margins to energy price shocks (e.g. Fetzer et al. 2024, Fontagné et al. 2023). In this column, we draw on the latest results from the Decision Maker Panel to provide an early read on how the recent shock is feeding through to firms’ price, wage, employment, and sales expectations.

The Decision Maker Panel

The Decision Maker Panel (DMP) is a monthly online survey of UK businesses. It was launched in 2016 and is run by the Bank of England in collaboration with King’s College London and the University of Nottingham. Each month, the DMP surveys around 2,000 UK firms with ten or more employees on their realised and expected output price growth, wage growth, employment, sales, and costs (see Bunn et al. 2024 for more details on the survey design). In previous years, it has been used to analyse and provide early insights into how Covid (Smietanka et al. 2020), the Russia-Ukraine war (Yotzov et al. 2022), and US tariffs (Bloom et al. 2025) are affecting UK businesses. 

In April 2026, a set of new questions was added to the survey specifically designed to gauge firms’ exposure to energy costs and how they expect to respond to the recent shock. Firms were asked to report their energy costs as a share of total costs in both 2019 and 2025, and whether their energy prices are currently fixed or hedged. Across all firms in the survey, energy costs rose from around 4% of total costs in 2019 to around 6% in 2025. The share of firms reporting that energy accounts for more than 5% of their total costs has increased from roughly one in five to nearly one in three, with significant differences across industries. Around two-thirds of firms currently fix or hedge their electricity prices, and just over half do so for gas. However, most of these contracts expire within six months, meaning that the pass-through from wholesale energy prices to firms’ costs is likely to intensify in coming months.

Higher prices and lower margins are the dominant expected responses

When asked how they expect the recent energy shock to affect their business over the next 12 months, firms overwhelmingly pointed to higher output prices and lower profit margins as key margins of adjustment. On a net balance basis (the share of firms expecting an increase minus the share expecting a decrease), 60% of firms expect to raise prices, while 62% expect lower margins (Figure 1). This is consistent with evidence from the 2022 energy price shock, which also led to higher prices (Fetzer et al. 2024) and squeezed profits (Manuel et al. 2024). By contrast, the expected impact on wages is much more muted, with a net balance of just +10%, and the expected drag on employment is moderate (net balance of −26%). Sales volumes are expected to fall on balance (−47%).

These effects are amplified for the most energy-intensive firms with energy costs above 5% of total costs (around one-third of firms). Among these firms, the net balance for higher prices rises to +68%, and for lower profit margins to −78%. The drag on expected sales volumes is also larger (−59%), as is the expected employment reduction (−34%).

Figure 1 Net balance of expected responses to energy prices: All firms vs. high-energy firms

Notes: This figure is based on responses to the question: “The war in Iran has led to higher energy prices. How do you expect these increases in energy prices to affect the following aspects of your business over the next year?” The data are based on 660 responses in the April 2026 wave of the DMP survey. Results are weighted by industry and employment shares. Net balance refers to the share expecting higher minus share expecting lower. High-energy firms are defined as firms with energy costs above 5% of total costs in 2025.

Firms’ inflation expectations have moved sharply

Consistent with higher prices being an important way in which firms will adjust to the energy shock, the April 2026 DMP survey shows a clear jump in firms’ own-price expectations for the year ahead. Expected own-price growth rose to 4.4% in April, up from 3.4% at the start of the year and 3.7% in March (Figure 2). While still below the peak of over 6% seen during the 2022 energy crisis, this is a notable acceleration. 

One-year-ahead CPI inflation expectations have also risen significantly, reaching 4.0% in April — up from 2.9% in January. Three-year-ahead CPI expectations have been more stable, edging up only slightly from 2.7% to 2.8%, suggesting that firms’ medium-term expectations remain more firmly anchored. This is consistent with the 2022 experience, when short-term inflation expectations rose sharply but longer-term expectations increased by less.

Figure 2 CPI inflation expectations and expected own-price growth

Notes: The data on own-price expectations are based on responses to the question: “Looking ahead, 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high, highest’. Respondents were then asked to assign a probability to each scenario. A point estimate is constructed by combining the five scenarios with the probabilities attached to them.” The data on CPI inflation expectations are based on responses to the question: “As a percentage, what do you think is the current annual CPI inflation rate in the UK? And, what do you think the annual CPI inflation rate will be in the UK, both one year from now and three years from now?” The latest observation is April 2026. Results are weighted by industry and employment shares.

There has been a clear rightward shift in the distributions of own-price expectations (Figure 3, Panel A) and one-year CPI inflation expectations (Panel B) in April 2026, compared to the three months before the war. Past research has shown the importance of studying the distribution of expectations for understanding inflation dynamics (e.g. Meeks and Monti 2024). In addition to the increases in average expectations, we also find an increase in the dispersion and skewness of expectations across firms in the latest data. Nevertheless, the distributions in the latest data are still significantly different from those during the 2022 shock. 

Figure 3 Distributions of own-price expectations and CPI inflation expectations

Notes: This figure shows kernel density plots for expected year-ahead own-price growth (Panel A) and one-year CPI inflation expectations (Panel B) for 2022, December 2025 to February 2026 (three months prior to the Iran war), and in the latest April 2026 data. Distributions are weighted by industry and employment shares.

The rise in own-price expectations has been larger for firms with higher energy costs. Figure 4, Panel A plots annual own-price inflation and own-price expectations separately for firms with energy costs below and above 5% of total costs. Among firms with higher energy costs, price expectations increased from 3.2% in February to 5.1% in April 2026. Firms with lower energy costs experienced a smaller increase from 3.3% to 4.1%. By industry, the pattern of firms expecting to raise prices is also strongly related to energy intensity (Figure 4, Panel B). In accommodation and food, over 90% of firms expect higher prices; in transport and storage and manufacturing the figure is around 77–78%. These industries are relatively intensive users of energy. By contrast, in less energy intensive industries such as information and communications and professional services, fewer than a third of firms expect higher prices. Firms in more concentrated markets are also somewhat more likely to expect to raise prices, even conditional on energy exposure.

Figure 4 Own-price expectations by energy costs and industry

Notes: Panel A plots annual own-price growth (solid lines) and expected year-ahead own-price growth (diamonds) separately for firms with energy costs below and above 5% of total costs. The solid diamonds denote months since the start of the Iran war. Panel B is based on responses to the question: “The war in Iran has led to higher energy prices. How do you expect these increases in energy prices to affect the following aspects of your business over the next year?” The data are based on 519 responses in the April 2026 wave of the DMP survey. Results are weighted by industry and employment shares.

Higher cost expectations, but little sign so far of energy feeding into wage growth

Expected unit cost growth — a broad measure that captures energy alongside labour and other input costs — has increased in the latest data and is now above the level of realised cost growth for the first time since the 2022 crisis. This suggests firms are anticipating further cost pressures ahead. Expected unit cost growth was also higher than expected own-price growth in April 2026 at 5.5%, consistent with further declines in margins over the next 12 months.

If higher aggregate inflation feeds through into higher wage growth, that could further increase firms’ costs and lead inflation to be more persistently higher. However, when it comes to wages, there is little sign at least so far of the energy shock driving higher expected wage inflation. So far, expected wage growth has changed little since the outbreak of the Iran war, reaching 3.5% in April 2026, although it had been gradually falling (Figure 5). While we do not know what would have happened in the absence of the energy shock, this is consistent with the results from the new questions which also point to a small impact on wages: 26% of firms expected higher energy prices to lead to higher wages while 16% expected lower wages (net balance of +10%). The picture suggests that firms do not expect higher price growth to lead to a renewed acceleration in pay growth, at least so far. Whether this holds will depend in part on how persistent the energy shock proves, how much slack there is in the labour market, and how much bargaining power workers have in wage negotiations.

Figure 5 Realised and expected wage growth

Notes: This figure is based on responses to the question: “‘Looking back, from 12 months ago to now, what was the approximate % change in your average wage per employee?’ and ‘Looking ahead, from now to 12 months from now, what approximate % change in your average wage per employee would you assign to each of the following scenarios?’. For the questions on year-ahead expectations, respondents were then asked to assign a probability to each scenario. A point estimate is constructed by combining the five scenarios with the probabilities attached to them.” The latest observation is April 2026. Results are weighted by industry and employment shares.

Finally, we do not find evidence of significant changes in firms’ sales or employment expectations in the latest data compared with the months just prior to the outbreak of the conflict. Employment growth remains weak in 2026, with little change expected in the year ahead. Meanwhile, overall business uncertainty has increased since the outbreak of the war in Iran but remains below the peaks in the beginning of 2020 and in the aftermath of the 2022 energy price shock. 

Conclusions

The April 2026 DMP data provide an early signal that UK firms are already responding to the rise in energy prices triggered by the conflict in the Middle East. Higher output prices and squeezed profit margins are the dominant expected adjustments, particularly for firms with the greatest energy exposure. Inflation expectations have moved up sharply in the near term, but there is little sign so far of the shock feeding through into wage growth expectations.

Whether these early signals translate into more persistent inflationary pressure will depend on the scale and duration of the energy shock and how it propagates through the economy. Key issues to monitor include the pass-through of higher energy and non-energy costs into firms’ prices, the extent to which firms instead absorb these costs through lower margins, and whether second-round effects emerge in wage- and price-setting. The DMP will be one of a range of indicators used to track these developments in real time, alongside other surveys, labour market indicators, and intelligence on firms’ pricing, margins and wage-setting behaviour.

Authors’ note: The views expressed here are those of the authors, and not necessarily those of the Bank of England or its committees.

References

Bank of England (2026a), Monetary Policy Report, April.

Bank of England (2026b), “Agents’ summary of business conditions – April 2026”.

Bloom, N, P Bunn, P Mizen, V Sasikaran, K Shah, G Thwaites and I Yotzov (2025), “The impact of the 2025 US tariff announcements on UK firms”, VoxEU.org, 27 July.

Bunn, P, N Bloom, A Crundwell, S Khan, C Menzies, P Mizen, M Sculthorpe, K Shah, G Thwaites and I Yotzov (2024), “The Decision Maker Panel: a user’s guide”, Bank of England Staff Working Paper 1096.

Fetzer, T, C Palmou and J Schneebacher (2024), “Navigating economic shocks: How firms adapted to the energy crisis”, VoxEU.org, 5 December.

Fontagne, L, P Martin and G Orefice (2023), “The many channels of firms’ adjustments to energy shocks: Evidence from France”, VoxEU.org, 18 July.

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Meeks, R and F Monti (2024), “Inflation expectations: Making all the information count”, VoxEU.org, 2 March.

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