People fill up at the pumps at a Costco gas station in West Thurrock, Essex. The Iranian conflict has caused oil and gas prices to soar. Photo date: Thursday, March 5, 2026.
Jordan Pettit – Pennsylvania Images | Pa Images | Getty Images
UK inflation stood at a solid 3% in February, according to the latest Office for National Statistics (ONS) figures, the last before the start of the Iran war.
Economists polled by Reuters had expected the consumer price index to be flat from last month.
Core inflation, which excludes energy, food, alcohol and tobacco, was 3.2% in February, up from 3.1% in January.
Grant Pfitzner, chief economist at the ONS, said of the
“This was offset by lower gasoline prices, as prices were recovered before the start of the Middle East conflict and the subsequent rise in oil prices,” he added.
This inflationary print covers the last monthly data before the US and Israel began airstrikes on Iran in late February, triggering retaliatory attacks by the Republic of Iran. of british pound Following the release of the data, the dollar fell 0.17% to $1.3385.
Global energy prices are soaring as the Strait of Hormuz, a key sea route for oil and gas from the Middle East, remains almost completely closed. The UK is particularly exposed to rising energy prices due to its dependence on oil and gas imports and lack of gas storage facilities.
Economists expect inflation to fall slightly in April as households cut utility bills following the government’s “green tax” cuts, but consumer prices are widely expected to rise significantly thereafter if the war continues.
Sanjay Raja, Deutsche Bank’s chief UK economist, warned on Wednesday that “inflation is poised to take another unwanted detour” in the future as it “braces for the fallout”, while Suren Thiru, chief economist at ICAEW, said a “brutal inflation surge” was coming.
“February’s change in inflation is a false flag for the economy, as it predates the spectacular energy shock caused by the Middle East conflict and the ensuing economic pain faced by consumers and businesses,” he said in emailed comments.
“The green tax cut should temporarily lower utility bills and bring inflation down next month, but soaring oil and gas prices mean a rampant inflation is looming, with headline interest rates likely to exceed 4% by summer,” he added.
BOE’s dilemma
The war rewritten inflation expectations in Britain, which was already experiencing stubbornly high inflation rates compared to its continental neighbors.
Nevertheless, inflation is expected to slow this year towards the Bank of England’s 2% target, giving the central bank room to cut interest rates.
But the war-induced rate cuts so far have paid off, and economists say the BoE is likely to keep rates unchanged at 3.75%, or even raise them again as it adjusts its inflation outlook.
Zara Noakes, global market analyst at JPMorgan Asset Management, said the UK inflation figures were “virtually old news and all eyes are now on what will happen as a result of the Middle East conflict”.
“Nevertheless, today’s upside surprise in core inflation should be a concern for the central bank, given that it shows we are still battling persistent price pressures, even before taking into account the recent rise in energy prices,” he added in emailed comments.
Bank of England (BOE) Governor Andrew Bailey during a monetary policy report press conference at the bank’s headquarters in London, England, Thursday, August 1, 2024.
Bloomberg | Bloomberg | Getty Images
But Mr Noakes said that while the energy shock would put upward pressure on inflation over the next few quarters, it was “very unlikely that there would be an inflation spike of the same magnitude as in 2022” following Russia’s invasion of Ukraine.
“We are in a very different world. The labor market is in a much weaker position, so workers worried about rising costs are less likely to feel able to demand higher wages, and price pressures are much less likely to intensify more broadly,” he said, arguing that the BoE should keep rates higher rather than raise them.
Last week, the Bank of England’s Monetary Policy Committee voted “unanimously” to keep the benchmark interest rate unchanged, saying, “The conflict in the Middle East is causing significant increases in global energy and other commodity prices, which will affect fuel and utility prices for households and indirectly through costs for businesses.”
“Prior to this, domestic price and wage disinflation continued. As a result of new shocks to the economy, CPI inflation will rise further in the near term,” the BOE warned.
The BOE said policymakers “are wary of the growing risk of domestic inflationary pressures through second-order effects in wages and pricing. That risk grows the longer energy prices remain high.”
“At current levels of oil and gas prices, it is far from clear that the criteria for a rate hike has been met,” said James Smith, an economist at ING.
“Certainly, no one knows exactly where the threshold for rate hikes actually lies, and last week’s meeting left us with a lot to learn. But a World Bank study last summer suggested that the effects of a second round tend to be more pronounced when headline inflation exceeds 3.5% to 4%. This is a useful line in the sand,” he added in an emailed analysis.
At current energy prices, UK inflation is likely to briefly peak at 4% in the autumn, according to ING. Alternatively, ING’s energy reference case could reach a peak of 3.5% in September as the disruption begins to ease through the second quarter and energy prices begin to fall gradually.
