UK inflation rises as prices at pump spike after Iran war

Inflation in the UK climbed in March after a sharp jump in prices at the petrol pump in the wake of the disruption to energy supplies caused by the Iran war, official figures showed on Wednesday.

The annual consumer price inflation rate increased to a three-month high of 3.3 per cent, from 3 per cent the previous month, according to the Office for National Statistics. The rise was in line with market expectations.

The main reason behind the inflation spike was higher motor fuel, which increased by a monthly 8.7 per cent — the largest increase since June 2022, shortly after the Russian invasion of Ukraine.

Airfares and food prices, both related to the spike in energy prices, were also higher.

Treasury chief Rachel Reeves, whose hopes over the cost-of-living have been blown off course by the crisis in the Middle East, said this is “not our war, but it is pushing up bills for families and businesses” as a result.

The economic fallout has put paid to any expectations that the Bank of England would cut borrowing costs. Prior to the start of the war on February 28, there had been an expectation in financial markets that the bank would cut its main interest rate from 3.75 per cent, given that inflation was predicted to fall back toward its 2 per cent target during the spring.

Inflation is set to rise further in the coming months, possibly to 4 per cent, as higher energy prices impact household bills.

No economist at present thinks inflation will get anywhere near the four-decade highs above 11 per cent in the wake of Russia’s invasion of Ukraine in February 2022, partly because oil and gas prices have not spiked as much and partly because interest rates are higher.

But Bank of England policymakers will be keeping a beady eye on whether the evident inflation spike starts to spread through the economy, via higher wages for example.

For now, economists think the bank will keep interest rates on hold at the next policy meeting on April 30.

Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, said that it will be “hard” to see workers and firms being able to push through higher wages and prices, given the relative weakness of both the labor market and the British 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.”

How inflation develops will depend on what happens in the war and the crucial waterway of the Strait of Hormuz, which has been largely closed to oil tanker traffic since the onset of hostilities, stoking fears over oil and gas supplies in many parts of the world.

A resolution sooner rather than later will limit the long-term impact. With the current ceasefire seemingly uncertain, financial markets remain on edge and energy prices will stay volatile.

Over the past couple of weeks, oil prices have oscillated between the $90-100 a barrel range, having gone even higher during the conflict.

Before the war, oil prices were pretty stable at around $60 a barrel.