UK Inflation Expected to Hold Steady at 3% Before Middle East Conflict Sparks Potential Surge
Fresh official figures are anticipated to reveal that UK inflation remained stable last month, but households could face a significant "twist" in the cost-of-living narrative in the coming months due to escalating conflict in the Middle East, according to economic experts.
February CPI Figures Show Steady or Slight Dip
The rate of Consumer Prices Index (CPI) inflation has been gradually easing back towards the Bank of England's 2% target level since last summer. Analysts are expecting CPI to have held relatively steady in February, or dipped slightly, from the 3% level recorded in January. Official statistics for last month will be published on Wednesday, with a consensus of economists indicating it will be recorded at 3% again for February.
Economists from Deutsche Bank and Pantheon Macroeconomics are among those anticipating CPI to hold steady at 3% in February, with lower fuel and services inflation being offset by higher clothing prices and air fares. Edward Allenby, senior economist for Oxford Economics, stated he believes CPI inflation fell to 2.8% in February, largely thanks to a predicted decline in petrol prices and slower inflation in the services sector.
Analysts for Barclays said they are expecting the headline rate to dip to 2.9%, also partly because of lower pump prices during the month. However, Sanjay Raja, Deutsche Bank's chief UK economist, cautioned that the inflation outlook has "rarely been more uncertain than it is now."
Middle East Conflict Muddies Economic Forecasts
In a research note, Raja wrote: "We expect the UK's disinflation story will take another twist on its (eventual) way down to target. The good news is that CPI is still expected to slide down in the coming months. The bad news? Higher energy prices appear poised to lift CPI meaningfully over summer, adding yet another hump in the inflation profile."
Economists have been revising previous projections in recent days and warning that the US-Israel war with Iran has significantly muddied the outlook for the economy. The Bank of England said on Thursday that recent increases in wholesale energy costs would delay the return of CPI inflation to target, as it was already observing higher fuel prices.
The central bank is now expecting inflation to be around 3% in the second quarter of 2026, up from the 2.1% that had been forecast in February. Central bankers stressed the situation is volatile and events over the next six weeks could shed light on the scale of the disruption and impact to prices.
Projections Point to Potential Inflation Spike
Economists have weighed in with their own projections of where inflation could go if current conditions persist. Mr Allenby said he is now expecting CPI inflation to exceed 4% during the second half of 2026. "Under our updated assumptions, we now anticipate a much sharper rise in petrol prices, while higher wholesale gas prices cause a 19% increase in the Ofgem energy price cap in July," he explained.
Pantheon Macroeconomics agreed that, if the latest spike in gas prices is sustained, then CPI could be headed to 4% later this year. This potential surge underscores the fragile nature of the UK's economic recovery and the significant influence of global geopolitical events on domestic price stability.
