UK inflation unchanged in February in last print before the Iran war

The latest data from the Office for National Statistics (ONS) reveals that the U.K. inflation rate remained steady at 3% in February, just before the outbreak of the conflict in Iran. Economists had expected the consumer price index to stay unchanged from the previous month. Core inflation, which excludes energy, food, alcohol, and tobacco, rose to 3.2% in February from 3.1% in January.

Grant Fitzner, the chief economist at ONS, noted that the price of clothing was a major driver of the increase in inflation, offset by a decrease in petrol costs collected before the Middle East conflict began. The ongoing blockade of the Strait of Hormuz, a crucial passage for oil and gas exports from the Middle East, has led to a surge in global energy prices. The U.K. is particularly vulnerable to rising energy costs due to its reliance on oil and gas imports and limited gas storage facilities.

Economists predict that inflation may decrease slightly in April due to cuts in household energy bills related to government reductions in “green levies.” However, a significant rise in consumer prices is expected in the following months if the conflict persists. Deutsche Bank’s Chief UK Economist, Sanjay Raja, warned of an impending inflation surge, while ICAEW Chief Economist, Suren Thiru, anticipated a sharp increase in oil and gas costs leading to a headline rate above 4% by summer.

The conflict in Iran has reshaped inflation expectations in the U.K., where the inflation rate was already higher compared to neighboring countries. The Bank of England (BOE) was anticipated to cut interest rates this year to reach its 2% target, but the war has put a halt to these plans. Economists suggest that the BOE may maintain interest rates at 3.75% or even raise them in response to the revised inflation outlook.

Zara Nokes, global market analyst at J.P. Morgan Asset Management, highlighted the concern over sticky price pressures and the impact of rising energy prices on inflation. She emphasized the need for the BOE to carefully monitor the situation before considering any rate hikes. The BOE recently decided to keep its benchmark interest rate unchanged, citing the significant increase in global energy prices due to the conflict in the Middle East.

ING Economist, James Smith, believes that the threshold for rate hikes has not been met yet, especially at current levels of oil and gas prices. He suggested that inflation may peak at 4% in the fall or reach 3.5% in September under different energy price scenarios. The BOE remains vigilant about potential inflationary pressures stemming from higher energy prices and their impact on wage and price-setting behaviors in the economy.