UK Inflation Rises to 3.3% as Iran War Impact Begins to Hit

UK inflation, showing first hit from Iran war, jumps to 3.3%

UK Inflation Rises Amid Global Tensions

By William Schomberg and Andy Bruce

LONDON, April 22 (Reuters) - British consumer price inflation rose to 3.3% in March from 3.0% in February, according to official data showing the first impact on prices from the Iran war which the Bank of England worries could lead to a return of persistently high inflation.

Factory gate prices also jumped and by much more than expected, the figures from the Office for National Statistics showed on Wednesday.

Drivers of Inflation Increase

Economists said the increases - driven largely by fuel - were unlikely to push the BoE's Monetary Policy Committee into raising interest rates as soon as next week's meeting and the key question was whether the jump in energy prices would ignite a broader inflation problem.

"Inflation will probably fall to 2.9% in April as the big hikes in regulated prices drop out of the annual comparison," said Ruth Gregory, deputy chief UK economist at Capital Economics.

"But the next eight months will be an uncomfortable ride for the MPC."

Fuel and Energy Prices

Economists polled by Reuters had mostly expected the headline rate of consumer price inflation to accelerate to 3.3%, driven by a rise in petrol and other fuel costs during March.

The price of motor fuels jumped by 8.7% on the month, the biggest rise since June 2022, shortly after Russia's full-scale invasion of Ukraine, the ONS said.

Services and Core Inflation

The data showed services price inflation - which the BoE watches closely as a sign of longer-term inflation pressures - rose unexpectedly to 4.5% from 4.3% in February.

But much of that increase was due to a rise in air fares driven by the timing of the Easter holidays.

Core inflation, which excludes more volatile food, energy, alcohol and tobacco prices and is also watched closely by the BoE, weakened to 3.1% from 3.2% in February. 

Impact of the Iran War

Pre-War Expectations

Before the U.S.-Israeli war on Iran began on February 28, the BoE said Britain's inflation rate - the highest among the Group of Seven economies for much of the last four years - was likely to be close to its 2% target in April.

Revised Forecasts

But last month the BoE sharply increased its inflation forecast due to the energy price shock, predicting it would rise towards 3.5% by the middle of 2026. The International Monetary Fund last week predicted British inflation would peak at 4% in the coming months.

Uncertainty for Policymakers

However, the BoE's interest rate-setters have mostly said it is too soon to know what the rise in headline inflation will mean for underlying price pressures in the economy, given the weak jobs market which could make it harder for workers to demand higher pay or for businesses to pass on higher costs.

The British central bank is expected to keep borrowing costs on hold on April 30 at the end of its next scheduled Monetary Policy Committee meeting.

Market and Producer Reactions

Interest Rate Expectations

Financial markets on Wednesday were betting on one or possibly two quarter-point interest rate rises by the BoE this year. But a Reuters poll of economists showed most expected no change in borrowing costs during 2026.

Producer and Services Price Inflation

The ONS figures showed cost inflation reported by manufacturers - some of which will filter through into consumer prices - soared last month.

Producer input price inflation leapt in March alone by 4.4%, the second biggest monthly increase since records began in 1984, behind only the increase in March 2022 due to the energy price shock spurred by the invasion of Ukraine.

Producer prices charged by services firms rose by 3.0% in the first quarter, up from 2.8% in the fourth quarter, the highest reading since the third quarter of 2024.

(Writing by William Schomberg; Editing by Muvija M and Andrew Cawthorne)