UK Inflation Holds Steady in February, But Middle East Conflict Threatens Sharp Rise
The UK's inflation rate is expected to have remained broadly stable in February, according to preliminary analyst estimates, but economists are warning of a significant "hump" in the cost-of-living crisis later this year due to escalating conflict in the Middle East.
Steady Figures Mask Underlying Volatility
The Consumer Prices Index (CPI) inflation has been gradually declining towards the Bank of England's 2% target since last summer. Official figures for February are due to be published on Wednesday, with various financial institutions offering their projections.
Economists from Deutsche Bank and Pantheon Macroeconomics anticipate CPI holding steady at 3%, mirroring January's rate. They suggest that lower fuel and services inflation may be counterbalanced by increased clothing prices and air fares.
Edward Allenby, senior economist at Oxford Economics, predicts a slight dip to 2.8%, attributing this primarily to falling petrol prices and slower inflation in the services sector. Similarly, Barclays analysts forecast a decrease to 2.9%, also citing reduced pump prices during the month.
Middle East Conflict Clouds Economic Outlook
However, the relative stability in February belies a highly uncertain future. Sanjay Raja, Deutsche Bank's chief UK economist, noted that the inflation outlook has "rarely been more uncertain than it is now."
In a research note, Raja explained: "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."
The recent US-Israel war with Iran has prompted economists to revise their projections, as the conflict threatens to disrupt energy markets and drive up costs.
Bank of England Revises Forecasts Upward
The Bank of England acknowledged on Thursday that recent increases in wholesale energy costs would delay CPI inflation's return to the 2% target. The central bank now expects inflation to be around 3% in the second quarter of 2026, a significant increase from the 2.1% forecast in February.
Bank officials emphasized the volatile nature of the situation, suggesting that developments over the next six weeks could clarify the extent of disruption and its impact on prices.
Potential Surge to 4% Inflation Later This Year
Economists have begun projecting where inflation could head if current conditions persist. Edward Allenby now anticipates CPI inflation exceeding 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," Allenby stated.
Pantheon Macroeconomics concurred, warning that if the recent spike in gas prices is sustained, CPI could reach 4% later this year. This potential surge represents a significant setback in the fight against inflation and would place additional pressure on household budgets already strained by the cost-of-living crisis.
The coming months will be critical in determining whether the UK economy can navigate these turbulent waters or faces another painful inflationary episode driven by geopolitical tensions and energy market volatility.
