Inflation in the UK climbed to a three-month high of 3.3% in March, driven by a sharp rise in fuel prices following the disruption to energy supplies caused by the Iran war, official figures showed on Wednesday.
Key drivers of inflation
The Office for National Statistics reported that the annual consumer price inflation rate rose from 3% in February to 3.3%, in line with market expectations. The main contributor was motor fuel, which increased by 8.7% month-on-month — the largest monthly rise since June 2022, shortly after Russia's invasion of Ukraine. Airfares and food prices also rose, reflecting higher energy costs.
Economic impact
Treasury chief Rachel Reeves, whose economic plans have been disrupted by the Middle East crisis, stated that “this is not our war, but it is pushing up bills for families and businesses.” The economic fallout has dashed expectations that the Bank of England would cut borrowing costs. Before the war began on February 28, financial markets had anticipated a rate cut from the current 3.75% as inflation was predicted to fall toward the 2% target this spring.
Inflation is expected to rise further in the coming months, possibly reaching 4%, as higher energy prices feed into household bills. Economists and Bank of England policymakers are closely watching whether the inflation spike spreads through the economy, for example via higher wages.
Expert analysis
Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, noted that it will be “hard” for workers and firms to push through higher wages and prices given the relative weakness of the labor market and the broader UK economy. “That should ultimately limit the size and extent of the coming inflation shock,” he said. “For now, though, the Bank of England is likely to remain in wait-and-see mode, keeping policy on hold next week and maintaining maximum optionality about whether interest rates ultimately end up increasing or decreasing later this year.”
Geopolitical factors
How inflation develops will depend on the course of the war and the status of the Strait of Hormuz, which has been largely closed to oil tanker traffic since hostilities began, stoking fears over oil and gas supplies globally. A swift resolution would limit the long-term impact. With fast-moving developments, financial markets remain on edge and energy prices volatile. Over the past couple of weeks, oil prices have oscillated between $90 and $100 per barrel, having peaked even higher during the conflict. Before the war, oil prices were relatively stable at around $60 per barrel.
