UK inflation jumped to 3.3% in March – up from 3% in February – as the energy shock triggered by conflict in the Middle East fed through to UK households and businesses. It marks the highest reading since December.
Scott Gardner, investment strategist at JPMorgan Personal Investing, said: “It was always a question of how much UK inflation would rise after the war with Iran broke out – we are now starting to see the disruption in the Strait of Hormuz and the resulting spike in energy prices that feed into elevated UK prices.”
The 8.7% monthly jump in motor fuel was the dominant driver of the headline increase, while higher airfares also contributed.
In addition, food inflation rose from 3.3% to 3.7% in the year to March, largely driven by chocolate and confectionary, meat, fish and soft drinks, which economists linked to the timing of Easter.
“The early inflationary signs are troubling, and this renewed increase in UK inflation will keep policymakers on alert over the short term,” Gardner said.
One bright spot is core inflation, which eased slightly to 3.1%, indicating underlying price pressures are easing slightly.
However, Luke Bartholomew, deputy chief economist at Aberdeen, warned that inflation will likely rise further once the true impact on household energy bills is felt after the Ofgem price cap re-set in July.
“Policymakers will be much more focused on whether higher energy prices start to contaminate a broader range of prices,” Bartholomew said.
“Certainly, inflation expectations are likely to remain elevated but with the labour market and broader economy relatively weak, it is hard to see workers and firms having much power to gain higher wages and push through higher prices as a response.”
He noted this should ultimately limit the size and extent of the coming inflation shock.
Indeed, the Bank of England forecasts that the CPI inflation rate will remain above its 2% target this year, instead potentially sitting at 3.5% under the end of 2026.
With the Bank of England’s monetary policy committee (MPC) set to meet on 30 April, the question now is what the spike in inflation means for interest rates. It is a difficult balancing act, as the committee must weigh the risk of inflation becoming more persistent against the need to support growth in the face of a negative supply shock.
Bartholomew said he expects the Bank 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”.
Derrick Dunne, chief executive officer of YOU Asset Management, said: “It is likely we will now see market expectations for a hike increase [in rates] ahead of next week’s MPC decision.”
“To hike now might not be the right course of action, especially given the weakness in the labour market, household and business resilience after four years of higher rates,” Dunne added.
“Even holding rates, given cuts were pencilled in, might also be risky.”