UK Inflation Hits 3.3% Amid Iran War Fuel Price Surge

UK consumer price inflation rose to an annual rate of 3.3% in March, up from 3.0% in February, according to official figures published by the Office for National Statistics (ONS). This increase marks the first significant impact on prices from the ongoing war in the Middle East.

The rise was driven primarily by a sharp increase in motor fuel prices, which jumped by 8.7% during March—marking the largest monthly increase since June 2022. Economists polled by Reuters had mostly expected this acceleration due to rising petrol and other fuel costs.

The data also showed that services price inflation, closely watched by the Bank of England (BoE) as a gauge of longer-term inflation pressures, rose to 4.5% from 4.3%. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, weakened slightly to 3.1% from 3.2%, according to Reuters.

The BoE had previously forecasted that the UK's inflation rate would be close to its 2% target by April before the war began on February 28. However, due to the energy price shock caused by the conflict, the BoE revised its prediction, anticipating inflation could rise towards 3.5% by mid-2026.

The British central bank is expected to keep borrowing costs steady at the end of its next scheduled Monetary Policy Committee meeting on April 30. Financial markets are betting on one or possibly two quarter-point interest rate rises this year, although a Reuters poll of economists showed most expect no change in borrowing costs during 2026.

Meanwhile, business activity in the euro zone suffered a surprise contraction in April as the U.S.-Israeli war with Iran sapped demand and prices soared. The S&P Global Flash Eurozone Composite Purchasing Managers' Index fell to 48.6 from March's 50.7, indicating a contraction below the 50.0 mark that separates growth from decline.

Chris Williamson, chief business economist at S&P Global, noted that the euro zone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers. Increasingly widespread supply shortages threaten to dampen growth further while adding more upward pressure to prices in the coming weeks.

Since the conflict began nearly two months ago, fuel prices have rocketed. The input price index jumped to 68.4 from 65.3, its highest reading since late 2022. An index covering the bloc's dominant services industry sank to 47.4 from 50.2, indicating a sharp decline in demand for services.

Financial markets have priced in nearly four rate hikes by the European Central Bank this year, starting June. The ECB faces the challenging task of deciding whether to raise interest rates amidst worrying inflation or focus on preventing the economy from sliding into a deeper downturn.