accelerated in March, as a surge in energy costs triggered by the Iran war started to hit consumers in the pocket.
The consumer prices index rose 3.3% from a year earlier, up from 3% the previous month, the Office for National Statistics said Wednesday. The figure was in line with the expectation of economists.
The pickup was driven by an 8.7% jump in the price of motor fuel, the largest monthly gain since 2022 when Russia invaded Ukraine. Services inflation, a key indicator of underlying price pressures, unexpectedly accelerated to 4.5% from 4.3% due to volatile airfares.
The report shows how the has upended the outlook for inflation, with Brent crude close to $100 a barrel as the US and Iran fail to reach an agreement to end a 53-day war that has brought Persian Gulf oil and gas exports to a near standstill.
“This is not our war, but it is pushing up bills for families and businesses,” Chancellor of the Exchequer Rachel Reeves said in a statement responding to the inflation report.
The squeeze is also threatening to ripple out beyond the petrol pump into other everyday goods and services, with domestic gas and electricity prices set to rise in July and warnings that food inflation could reach close to double digits.
An inflation reading in line with forecasts is likely to support economists’ more cautious outlook for interest rates and prices. The pound was little changed following the data at $1.3520 and bets on BOE rate hikes eased, with investors fully pricing in one quarter-point rate increase and a 50-50 chance of a second.
Inflation had been on track to fall to the 2% target in the second quarter, clearing the way for further interest-rate cuts from the Bank of England. Now, however, it’s expected to stay at around 3% and accelerate in the third quarter, raising the possibility of rate increases instead.
While policymakers are expected to keep borrowing costs on hold on April 30 as they seek more clarity on the conflict, they’ve signaled they are ready to act if needed to stop the energy price shock from spilling over into second-round effects.
How far workers can bid up wages and firms increase prices may be curtailed by the state of demand, however, with data this week showing real wages under pressure and firms cutting jobs.
“With the labor market weak, we still think a prolonged pause, rather than a series of interest rate hikes is the most likely outcome,” said Ruth Gregory, deputy chief UK economist Capital Economics.
The rise in services inflation was largely driven by airfares jumping 10% on the month – the largest increase since 2016 — as an early Easter pushed up prices for some long haul routes. All prices were collected before the beginning of the Middle East war on Feb. 28.
Excluding , package holidays and education — a gauge of core inflation — as well as often erratic accommodation services, annual services inflation held steady in March at 4.5%, estimates by Bloomberg Economics show.
Food inflation, which tends to have an outsized effect on household expectations, accelerated to 3.5%, up from 3.2% the month before. Prices for chocolate and confectionery, meat, fish and soft drinks picked up at an accelerated rate in March, the ONS said. Downward pressure on inflation came from clothing as retailers discounted prices amid sluggish demand.
What Bloomberg Economics Says
- “With the labor market loose and demand soft, we see a low risk that a bout of energy-induced inflation will lead to stronger domestic cost pressure. That’s why we expect the Bank of England to respond by keeping rates steady, rather than hiking them.
- Dan Hanson and Matt Bunny, economists. Click to read the full REACT on the Terminal
BOE officials are closely watching inflation expectations for signs of future price pressures. Speaking in Washington last week, external rate-setter Megan Greene said households may be more sensitive to rising prices after the Ukraine war energy shock.
A recent BOE survey showed businesses planned bigger price increases in March to offset higher costs caused by the Middle East conflict, while they lowered wage expectations.
Wednesday’s ONS figures showed raw materials for businesses and goods leaving factories rose substantially in March, driven by higher crude oil and petrol prices.