UK Inflation Holds Steady as Experts Warn of Cost-of-Living 'Twist' Ahead
The UK's inflation rate is expected to have remained relatively stable in February, but economists are sounding alarms about an impending "twist" in the cost-of-living crisis. Official Consumer Prices Index (CPI) figures for last month will be released on Wednesday, with analysts predicting a slight dip or steady hold from January's three per cent level.
Analyst Forecasts and February Expectations
Economists from Deutsche Bank and Pantheon Macroeconomics anticipate CPI to hold steady at three per cent in February. They note that lower fuel and services inflation may be offset by rising clothing prices and air fares. Edward Allenby, senior economist at Oxford Economics, projects a fall to 2.8 per cent, largely due to predicted declines in petrol prices and slower services sector inflation. Barclays analysts expect a dip to 2.9 per cent, also citing lower pump prices during the month.
Uncertain Outlook and Energy Price Surge
Sanjay Raja, Deutsche Bank's chief UK economist, highlighted the heightened uncertainty in the inflation outlook. He warned that the disinflation story could take another twist on its path to the Bank of England's two per cent target. While CPI is expected to slide in the coming months, higher energy prices from the Middle East conflict are poised to lift inflation significantly over the summer, creating another hump in the profile.
Revised Projections and Bank of England Warnings
The Bank of England raised its inflation forecasts on Thursday, citing recent increases in wholesale energy costs that will delay CPI's return to target. It now expects inflation around three per cent in the second quarter of 2026, up from a previous forecast of 2.1 per cent in February. Economists have been revising projections due to the US-Israel war with Iran, which has muddied the economic outlook.
Potential Scenarios and Long-Term Impact
If current trends persist, inflation could spike sharply. Mr. Allenby now expects CPI to exceed four per cent during the second half of 2026, driven by a sharper rise in petrol prices and a 19 per cent increase in the Ofgem energy price cap in July due to higher wholesale gas prices. Pantheon Macroeconomics agrees that sustained gas price spikes could push CPI to four per cent later this year. The central bank stressed the volatile situation, noting that events over the next six weeks will clarify the scale of disruption and price impacts.
