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UK inflation accelerated to 3.3 per cent in March, led by a surge in petrol prices, in one of the starkest signs so far of the hit to the economy from the Iran war.
Wednesday’s figure from the Office for National Statistics represented a sharp increase from February’s 3 per cent and matched the forecast of analysts polled by Reuters.
Higher prices at the pump drove the biggest rise in transportation costs since 2022, the ONS said. Rising food costs also helped push inflation higher.
The numbers lay bare the challenge facing rate-setters at the Bank of England, who meet next week to consider how to respond to the energy shock triggered by the closure of the Strait of Hormuz and strikes on Gulf infrastructure.
Before the US and Israeli attacks on February 28, the BoE’s Monetary Policy Committee was preparing to lower interest rates from the current level of 3.75 per cent and had forecast inflation would ease to 2.1 per cent in the second quarter.
In a sign of how radically the economic effects of the conflict have upended the picture, the BoE last month said inflation could touch 3.5 per cent in the third quarter if the energy shock was prolonged.
Traders are now betting on at least one interest rate rise this year, though they are putting low odds on a move next week.
With last month’s increase in inflation already anticipated by traders, the figures drew a muted response. The pound was up 0.2 per cent at $1.353 while the yield on the 10-year gilt dipped 0.01 percentage points to 4.88 per cent.
Core inflation, which excludes energy, food, alcohol and tobacco, was 3.1 per cent — slightly below economists’ forecasts and February’s reading. Services inflation, a key gauge of price pressures for the MPC, rose to 4.5 per cent in March from 4.3 per cent in February.
Pooja Kumra, a rates strategist at TD Securities, said the price pressures in the services sector “suggest that the BoE cannot be complacent in dismissing the second-round effects of energy prices”.
Economists expect divisions within the MPC to reopen on how to tackle resurgent inflation when rate-setters meet next week.
Andrew Bailey, the bank’s governor, has signalled he anticipates that a weak labour market will reduce the threat of a surge in energy costs fuelling a wage-price spiral.
Growth in pay was slowing on the eve of the war, according to official figures published on Tuesday. Average weekly wages were 3.6 per cent higher in three months to February from a year earlier, down from 3.8 per cent in the period to January.
Peter Dixon, senior economist at the National Institute of Economic and Social Research, said: “The MPC’s dilemma in the coming months is whether it should look through what may only be a temporary rise in inflation, or whether it will need to tighten policy to tackle second-round effects.”
He expects that the MPC will deliver one “precautionary [quarter-point] rate increase” in coming months to avoid the risk of appearing complacent over the inflationary threat.
The spectre of a protracted period of higher prices is also a damaging blow to the government, which was counting on lower inflation and declining interest rates to help cut the cost of living and boost economic growth.
In an indication of her frustration, chancellor Rachel Reeves this month described the US-Israeli war on Iran as a “folly”.
Responding to the data on Wednesday, Reeves said: “This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down.”
While acknowledging the effects of the war, Sir Mel Stride, the shadow chancellor said that “Labour’s choices have made everything worse and made our economy vulnerable”.
The latest ONS figures also extend a trend of UK inflation outpacing that in the Eurozone, which was 2.6 per cent in March. The IMF in its latest World Economic Outlook predicted the UK will now face 3.2 per cent inflation over the course of 2026, well above its forecast for 2.6 per cent in the euro area.
