LONDON – UK inflation rose to 3.3% in March from 3.0% in February, driven by higher energy prices and rising producer input costs.

According to Reuters (22/4), data from the Office for National Statistics show price pressures are beginning to reflect the impact of the Iran conflict, raising concerns at the Bank of England (BoE) about a potential resurgence of persistent inflation.

Producer input price inflation jumped 4.4% month-on-month in March, marking the second-largest increase since records began in 1984.

However, economists believe the energy-driven increase may not be sufficient to prompt the BoE’s Monetary Policy Committee to raise interest rates at its 30 April meeting.

Market focus is now on whether rising energy costs will feed into broader inflation or be offset by a weakening labour market.

Danni Hewson warned that stagflation risks are looming. “If policymakers do not act, inflation could become entrenched; if they act too aggressively, recession risks rise,” she said.

Views within the BoE remain divided. Governor Andrew Bailey has indicated there is no need to rush, while chief economist Huw Pill warned that a “wait-and-see” approach risks fuelling inflation expectations, particularly after inflation exceeded 11% in 2022.

Detailed data from the ONS show motor fuel prices rose 8.7% in March, the largest increase since mid-2022.

Services inflation—a key gauge of underlying price pressures—rose to 4.5% from 4.3%, driven by higher airfares during the Easter holiday period. By contrast, core inflation eased slightly to 3.1% from 3.2%.

Ruth Gregory expects inflation to ease to 2.9% in April due to base effects, but cautioned that the outlook remains “uncomfortable”.

Before the escalation of the conflict in late February, the BoE had expected inflation to approach its 2% target by April. However, following the surge in energy prices, projections have been revised upwards to around 3.5% by mid-2026.

The International Monetary Fund (IMF) has even projected that UK inflation could peak at around 4%.

In financial markets, investors are pricing in one to two rate hikes this year, although a Reuters poll shows most economists expect no change throughout 2026.

The inflationary pressure complicates efforts by Chancellor Rachel Reeves to support growth, while also adding challenges for Prime Minister Keir Starmer. (SF/ZH)