UK Inflation Showing First Hit from Iran War

• The United Kingdom inflation rose to 3.3% in March 2026 (from 3.0% in February 2026), marking the first clear pass-through of the Iran war into consumer prices, with the Bank of England warning this could reignite the country’s persistently high inflation problem.
• The increase was driven largely by energy, with motor fuel prices jumping 8.7% month-on-month, the largest rise since mid-2022. Factory cost pressures intensified, as producer input price inflation surged 4.4% in March, pointing to further pipeline inflation that could feed into consumer prices in the coming months.
• Underlying price pressures were mixed, with services inflation rising unexpectedly to 4.5%, although partly driven by temporary factors such as air fares, while core inflation edged lower to 3.1%, suggesting limited broad-based pass-through so far.
• Despite the uptick in inflation, economists expect the Bank of England to hold interest rates at its upcoming meeting, as policymakers assess whether higher energy prices will translate into sustained wage growth, particularly given a softening labour market that may dampen second-round effects.
• The outlook underscores rising stagflation risks, with policymakers facing a difficult trade-off between containing inflation and supporting growth, as the energy shock adds to existing economic weakness and raises the likelihood of a slowdown in the second half of the year.
• Looking ahead, inflation is expected to remain elevated and potentially rise further toward 3.5% by mid-2026, with the IMF projecting a peak near 4%, highlighting the persistence of energy-driven price pressures and the uncertainty around the inflation trajectory.

(Source: Reuters)