After several years of battling construction inflation, housing providers had begun to see a more stable pricing environment emerge. Construction cost inflation slowed significantly from the double-digit rates experienced during the post-pandemic period, supply chains largely normalised and interest rates started to move lower.
However, the escalation and on-going nature of the US-Iran conflict has introduced a fresh inflationary risk for housing authorities and housing associations. The link between events in the Middle East and a housing development site in the UK runs through energy markets, commodity prices, transportation costs and labour markets. If the conflict proves prolonged, it could place renewed upward pressure on development expenditure, and on repairs and maintenance budgets.
Construction inflation has moderated but remains elevated
The Office for National Statistics (ONS) Construction Output Price Indices show that construction inflation has slowed considerably since the sharp increases experienced between 2021 and 2023. Indeed, the latest figures for annual housing (public and private) new work and repair & maintenance output price inflation in March 2026 slowed to 1.7% and 1.2% respectively, and both indices were up by much less than the CPI and RPI indices. In fact, new work inflation was at its lowest annual rate since December 2020.
The data, however, is reported every three months and with a lag, with the next edition due in August. Real time data, such as the price balances in the S&P Construction PMI series, suggest that the Iran conflict is already having a price impact. The input price balance in April jumped at the sharpest rate since June 2022, led by fuel costs. We should also take into account that the new work ONS output price index is 36% up on pre-pandemic levels, meaning that any new inflationary shock for new development would be applied to an already elevated cost base.
This rise in input costs is occurring at a desperate time for many construction firms. Construction activity is weak, as denoted in repeated PMI readings well below the neutral 50 level. The ONS also reported a sharp decline in new orders for public and private housing in Q1 2026, despite the government’s expressed target of 1.5 million new homes over the parliament, suggesting that the conflict immediately dampened investment activity. These companies cannot absorb a new inflationary surge, so it will be passed directly to buyers.
Energy and fuel prices remain the biggest risk
The most immediate economic consequence of the Iran conflict has been volatility in global oil and gas markets. Concerns surrounding the security of shipping routes through the Strait of Hormuz have periodically pushed energy prices higher, despite efforts by the US administration to control the narrative. This has already been noticeable in aircraft and motor vehicle fuel, and will soon come through in retail energy bills.
Energy is embedded throughout the construction supply chain. Cement kilns, brick manufacturing plants, steel mills, glass production facilities and aluminium smelters are all highly energy-intensive operations. UK wholesale electricity prices have so far risen 38% year-on-year. When energy costs rise, manufacturers inevitably face pressure to increase prices.
As already noted, transportation costs have also moved higher, although show signs of peaking following a reduction in the crude oil price. However, shipping costs have rocketed as it became apparent that a not-insubstantial element of the global commercial fleet was stuck in the Gulf. The Baltic Dry Index, a measure of shipping costs for bulk raw material cargoes, is up by over 50% since the start of April. Most construction materials require multiple stages of processing and distribution before reaching site, meaning higher fuel and transportation costs can ripple through the supply chain.
Commodity prices seeing renewed pressure
Global commodity prices have seen renewed price growth since the Iran conflict started at the end of February, many of which are used in construction. Copper is up 33% since last year, steel 36%, aluminium 48%, plastics between 4% and 25%. Some of this represents higher energy costs and some scarcity due to export routes being through the Gulf or other contested areas.
Lower wage growth will help, but it’s also a sign that not all is well
Of course, materials and energy are only part of the story, but wage costs in the construction sector, after sharp rises in 2024 and early 2025, have been moderating. According to ONS average earning data, post-pandemic year-on-year construction wage growth peaked at 8.1% for the three months to March 2025, but has been steadily easing over the past year as weak activity has taken its toll. In March 2026, the ONS reported the same measure at -1.8%; this represents a fairly substantial decline in real terms, albeit from a high base.
Across the economy in general, the Bank of England is no doubt hoping that the expansion of labour market slack (read higher unemployment and weak labour demand), and the resultant downward pressure on wage growth, will obviate the need for higher Bank Rate, as it dampens growth and therefore inflation. Housing providers will be hoping for a similar outcome, at least in relation to borrowing costs, but slow growth or even recession is on nobody’s list of desirable outcomes given the additional pressures it creates on families and social housing needs.
The flip side to low construction activity levels is the increasing number of construction companies facing untenable financial conditions and possibly insolvency. Fewer suppliers may well create a supply issue that could boost prices for buyers. A reminder that the economy has many interconnected relationships.
So what is the likely outcome?
The housing sector has spent the last few years adapting to a dramatically different cost environment. Although inflation has eased, recent geopolitical events serve as a reminder that construction costs remain vulnerable to external shocks.
At present, it is far too early to conclude that a persistent inflation shock is inevitable. Much will depend on the duration and scale of the conflict and its impact on global energy supplies, and how UK businesses absorb the rise in energy and material costs. Producer prices data suggest input costs have risen sharply and a substantial portion of that is being passed on at the factory gate. But given weak business investment and spending amid a downturn in economic activity, are companies going to be able to pass on higher prices further down the supply chain?
The main point is that the risk is real, so a focus needs to be maintained on sensitivity testing for developments and general business plans for potential worst-case scenarios, for both inflation and borrowing costs.
For housing associations and local authorities planning new developments, maintaining existing stock or preparing long-term business plans, the message is that construction inflation is likely to continue to be volatile. If energy markets remain unsettled and commodity prices continue to rise, the sector could once again find itself grappling with higher costs across both development and maintenance programmes.
If you want to discuss our forecasts for economic variables, including construction inflation, please get in touch with Nick Keeling at nkeeling@arlingclose.com.
04/06/2026
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