Inflation moved higher in March as energy costs surged
Inflation in the United Kingdom accelerated in March as the war in the Middle East pushed fuel prices sharply higher, creating a more difficult backdrop for households, businesses, and policymakers. The latest data showed that the annual inflation rate rose to 3.3% in March, up from 3.0% in February, according to the Office for National Statistics. That marked the highest reading since December and matched economist expectations.
The increase matters because it interrupts what had previously looked like a gradual path back toward the Bank of England’s 2% inflation target. Before the conflict began, policymakers expected inflation to ease further in April, helped by softer wage growth and the removal of some charges linked to renewable-energy funding. Instead, the war has altered that trajectory and reintroduced energy costs as a major inflationary force.
This shift does not necessarily mean the Bank of England will respond immediately with tighter policy. But it does mean the central bank faces a more complicated environment just as it approaches its next policy meeting.
Fuel prices were the main source of pressure
The clearest driver behind the March increase was the sharp rise in fuel and lubricant prices. The ONS said those prices were 8.7% higher in March than in February, the largest monthly increase since June 2022. That jump followed a broad surge in global energy prices after the first U.S.-Israeli strikes on Iran at the end of February.
Since that point, Brent crude has risen more than 35%, while benchmark European natural gas prices have climbed more than 30%. Those moves have fed directly into consumer prices and revived concerns that energy may once again become a major inflation transmission channel across the economy.
This is especially significant for the U.K. because energy costs tend to filter quickly through transport, logistics, and household budgets. Even if the first-round impact is concentrated in fuel, the broader concern is whether those increases will eventually spill into wages, services, and pricing decisions across other sectors.
The Bank of England faces a more difficult policy balance
The latest inflation reading is unlikely, on its own, to force the Bank of England to raise rates at next week’s policy meeting. Even so, it complicates the central bank’s task. Policymakers now have to assess whether the rise in headline inflation is mainly an energy shock that will fade, or the start of a broader inflation cycle that could become harder to control.
Markets initially reacted to the war by expecting a much more aggressive policy response. Soon after the conflict began, investors priced in as many as four rate increases this year from the current 3.75% level. Bank of England Governor Andrew Bailey pushed back against that view, saying markets were getting ahead of themselves. Even so, current market pricing still suggests investors expect one or two quarter-point increases in 2026, according to LSEG data.
That makes the upcoming period especially sensitive. The Bank is widely expected to leave rates unchanged next week, but officials will be watching closely for signs that higher energy costs are starting to reshape inflation expectations more broadly.
The U.K. may be especially exposed to the shock
The inflation problem may prove more difficult for the U.K. than for many other advanced economies. Forecasts released last week by the International Monetary Fund suggested the conflict would hit Britain harder than any other major advanced economy. A key reason is the country’s greater reliance on gas imports, which makes it more vulnerable to external energy-price shocks.
The IMF also lowered its forecast for U.K. economic growth this year to 0.8%, down from 1.3%in its January projections. That downgrade reflected both the energy shock itself and the growing expectation that interest-rate cuts will be fewer than previously hoped.
This combination is particularly uncomfortable. Slower growth and higher inflation are difficult to manage together. If inflation remains elevated, the central bank may have less room to support the economy. But if growth continues to weaken, the argument for tighter policy also becomes harder to sustain.
Inflation is rising elsewhere too
The U.K. is not alone in facing this pressure. The conflict has had inflation effects across multiple economies. In the eurozone, headline inflation rose to 2.6% in March, up from 1.9% in February, moving back above the European Central Bank’s 2% target.
That broader pattern shows that the current shock is not purely domestic. It reflects a wider reacceleration in energy-led inflation across developed economies. For central banks, this creates a shared dilemma: how to respond to a geopolitical energy shock without overreacting to what may prove temporary, while also avoiding the mistake of letting price pressures become more embedded.
For the Bank of England, that comparison matters. If inflation across Europe remains elevated, U.K. policymakers may become even more cautious about assuming the latest rise will fade quickly.
Core inflation eased, but services inflation moved higher
A closer look at the March numbers reveals a more mixed picture beneath the headline rate. Core inflation, which excludes more volatile food and energy prices, eased slightly to 3.1% from 3.2% in February. That offers some reassurance that underlying inflation pressure did not broadly accelerate in the same way as the headline number.
However, services inflation rose to 4.5% from 4.3%, driven largely by a jump in airfares linked to the earlier timing of Easter. While that increase may partly reflect seasonal factors, services inflation remains important because it is often seen as a better guide to domestically generated price pressure.
This split creates a more nuanced picture. On one hand, the fall in core inflation suggests the economy is not yet experiencing a generalized second wave of inflation. On the other hand, persistent strength in services prices means the Bank of England cannot become too relaxed.
The real risk is what happens next
Economists say the biggest challenge is not necessarily the immediate jump in headline inflation, but the possibility of second-round effects. That is, higher energy prices could eventually lead to stronger wage demands and broader price increases across the economy.
Jack Meaning, chief U.K. economist at Barclays, said the real difficulty is that policymakers may not get clear evidence of these second-round effects for six to twelve months. By then, it will become easier to see whether wage growth is picking up again and whether higher inflation expectations among consumers and businesses are being translated into price increases in a wider set of goods and services.
This timing problem is crucial. Central banks often have to decide whether to act before the evidence is fully visible. If they wait too long, inflation can become more entrenched. But if they tighten too early or too aggressively, they risk weakening an already fragile economy.
Policymakers remain divided on how to respond
This uncertainty is reflected in the differing views among policymakers and analysts. Some officials, including Bank of England chief economist Huw Pill, have suggested the central bank should be prepared to act quickly if price pressures threaten to get out of control. That view is shaped in part by criticism that central banks responded too slowly after Russia’s full-scale invasion of Ukraine in 2022.
Pill has expressed skepticism toward a passive wait-and-see approach, arguing that policymakers need to be clear about what exactly they are waiting to observe. His comments suggest concern that if the Bank delays too long, it may again find itself behind the curve.
Others take a different view. Figures such as Alan Taylor of Columbia University have suggested that the weak economy and soft labor-market backdrop seen before the conflict make it doubtful that rate increases will ultimately be necessary. In that argument, the economy may be too sluggish to generate a sustained inflation spiral even if energy temporarily pushes headline inflation higher.
The most likely short-term outcome is no change in rates
For now, the most widely expected outcome is that the Bank of England will leave interest rates unchanged at its next meeting. Yael Selfin, chief economist at KPMG U.K., said the latest rise in headline inflation is unlikely to push the central bank into immediate action.
Her view is that while the Bank will monitor price pressures very closely in coming months, the weak state of the economy could limit the degree to which inflation accelerates more broadly. That could allow the Monetary Policy Committee to keep rates unchanged through 2026 rather than rush into additional tightening.
That assessment seems to fit the broader market mood. Investors understand that inflation has worsened, but they also see that growth is fragile and that the current shock is being driven heavily by energy. Unless policymakers become convinced that second-round inflation effects are taking hold, a wait-and-monitor stance remains the most plausible path.
U.K. inflation rose to 3.3% in March as the war in the Middle East sent fuel prices sharply higher, disrupting earlier expectations that inflation would continue to drift back toward target. The increase has made the policy outlook more difficult for the Bank of England, even if an immediate rate hike still appears unlikely.
Fuel and energy were the main drivers of the March rise, while the deeper concern now is whether higher costs will spill into wages and broader prices over the next several months. With core inflation easing slightly but services inflation still elevated, the Bank faces a complicated mix of warning signs and temporary distortions.
For now, the most likely near-term response is caution rather than action. But if energy-driven inflation starts to spread through the wider economy, the Bank of England may find that the cost of waiting becomes harder to justify.
