100 days on: how the Iran conflict is reshaping the outlook for UK construction

100 days on from the first US and Israeli airstrikes on Iran, and with no clear end in sight to the conflict, BCIS senior economist Sam Parkin considers the knock-on effects for the UK construction industry.

How is the conflict affecting inflation?

One hundred days on, the Iranian conflict continues to influence commodity markets and global supply chains. As the conflict has persisted, its effects have spread beyond commodity prices and into the wider global economy.

The UK is especially exposed. As an island economy that relies heavily on imports of food, raw materials and energy, it is highly vulnerable to external shocks. When energy prices rise, transport costs increase, making imports more expensive. As a result, inflation may remain higher for longer in the UK, particularly if the conflict continues.

Despite this, UK inflation fell to 2.8% in April, down from 3.3% in March. However, this figure does not necessarily reflect the underlying inflationary picture. The decline was partly driven by Ofgem’s reduction in the energy price cap in April, which temporarily offset upward pressure from higher oil and gas prices. Inflation may rise again in May as increases in oil, gas, petrol and diesel are more fully reflected in the data. The energy price cap is also set to rise in July, reflecting higher natural gas prices, which will reflect the inflationary pressure faced by consumers today. Combined with rising prices for imported goods, including food, which may face further pressure from fertilizer shortages, inflation could remain elevated for longer, potentially peaking in the fourth quarter of 2026 before easing gradually.

What does this mean for interest rates and borrowing costs?

This has direct implications for interest rates. Earlier in the year, markets expected two Bank of England rate cuts. That expectation has now shifted towards two rate increases in 2026, reflecting persistent inflationary pressure. This, in turn, affects mortgage rates, which are more sensitive to market expectations. While they have since declined, mortgage rates rose sharply after the outbreak of the conflict, even before any change in official rates, and remain elevated compared with pre-conflict levels.

How is the conflict affecting economic growth?

The consequences for GDP are more mixed. Before the conflict, the International Monetary Fund projected UK annual growth of 1.3%. It later reduced this forecast to 0.8% in April before revising it up to 1.0% after stronger-than-expected first-quarter data showed quarterly growth of 0.6%. However, the duration of the conflict remains a key risk. One hundred days on, with oil still above $100 per barrel and no clear resolution in sight, growth forecasts could be revised down again as higher costs continue to weigh on the economy. Economic momentum may weaken further, with some forecasts pointing to recessionary conditions in the second and third quarters of 2026, reducing business and consumer confidence.

What is the impact on construction demand?

The impact is already becoming visible in construction activity. Earlier expectations pointed to expansion across most major sectors, but rising uncertainty and the prospect of higher interest rates have weakened the outlook. Most private-sector segments are now forecast to contract, particularly residential construction, which is highly sensitive to mortgage rate increases. A modest improvement in repair and maintenance is expected, but this is unlikely to offset the decline in new work output.

What are the latest indicators telling us?

The S&P Global UK Construction PMI fell again in May, recording its sharpest decline in six years. All major sectors – housing, commercial and civil engineering – saw steep falls in output, as elevated borrowing costs and rising economic and political uncertainty weighed on demand and delayed project starts.

This tension between rising costs and weaker demand is also reflected in feedback from the BCIS Tender Price Index (TPI) Panel in 2Q2026. The panel, which comprises practising cost consultants from firms involved in multiple tenders across the UK, reported cost pressures in energy-intensive materials.

Several respondents highlighted rising steel prices linked to geopolitical tensions and trade measures. Petroleum-derived products such as PIR insulation, PVC and roofing materials are also expected to see upward pressure.

How has the conflict affected commodity prices?

The most immediate impact of the Iranian conflict on commodity prices has been through energy markets. Brent crude oil, despite volatile fluctuations, has remained above $100 per barrel since mid-March. For context, during the onset of the Russia-Ukraine conflict, Brent stayed above $100 for roughly five months as markets adjusted to the supply shock. That episode saw a slower recovery, allowing inflationary pressures to become more embedded over time. A similar risk remains today. The longer oil prices remain elevated, the more likely inflationary pressures are to feed through supply chains.

There are already signs of this in the UK. As an import-dependent island economy, the UK is particularly vulnerable. Imported goods face higher costs due to increased freight expenses, driven by elevated fuel and insurance costs, both of which have risen sharply.

Natural gas prices have also remained significantly higher, with approximately 20% of global natural gas shipments passing through the Strait of Hormuz. Interestingly, however, natural gas prices have not reached the extremes seen during the Russia-Ukraine conflict. This can be attributed to milder weather, reduced reliance on natural gas and greater renewable energy capacity absorbing some of the demand pressure, all of which have helped keep prices lower.

That said, energy costs are still expected to rise further. Despite the April reduction in the UK energy price cap, agreed earlier in the year, the cap is set to increase in July, reflecting higher global natural gas prices.

Which construction materials are most affected?

Away from energy, non-ferrous metals, a raw material used in many downstream goods, have also increased in price. Notably, aluminium prices have surged in recent months. Prices rose from $2,967 per tonne in early January 2026 to $3,769 per tonne by late May 2026, approaching the peak levels seen during the Russia-Ukraine conflict. This reflects structural supply constraints, with approximately 20% of aluminium shipments passing through the Strait of Hormuz. Given that weak demand would normally suppress price increases, the magnitude of this rise highlights the scale of the supply constraints associated with the conflict.

Copper, which was already elevated before the conflict, has struggled to recover in price. However, a key caveat applies to copper and many other upstream commodities: the conflict is exacerbating existing pricing pressures. Copper prices, though already high, could be higher still without the additional strain on supply chains.

Has the full impact on construction costs been felt yet?

However, the full impact of the conflict-driven energy shock may not yet have been felt. Many companies have contracts and supply arrangements that provide some protection against short-term volatility. If energy prices remain elevated for a prolonged period, firms may need to reduce purchasing activity or absorb higher costs to remain competitive, placing pressure on margins.

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