UK inflation rose in March in a clear sign of the impact of the Iran-US war on the economy.
The latest figures, released on Wednesday, are the first from the Office for National Statistics (ONS) to include elevated petrol and diesel costs since the start of the conflict. Prices have gone up as a result of the closure of the Strait of Hormuz shipping corridor.
The ONS figures showed consumer prices index (CPI) inflation rose 3.3 per cent in the year to March, up from 3 per cent in February.
The increase marks a blow for chancellor Rachel Reeves, who has made cutting the cost of living her number one priority. Research by the Resolution Foundation has found that the average household will be £480 worse off this year due to increased energy costs.
In response, Ms Reeves said the Iran crisis was “not our war, but it is pushing up bills for families and businesses”.
She continued: “That’s why it’s my number one priority to keep costs down. Our economic plan is the right one and has put us in a stronger position to support families in the face of this new crisis.”
Pointing to measures announced before the conflict, she said: “We’ve taken £117 off energy bills, frozen rail fares and protected motorists with the fuel duty freeze.
“We’re acting to protect people from unfair price rises if they occur, to bring down food prices at the till, and are boosting long-term energy security – building a stronger, more secure economy.”
Heating oil, some food prices, including chocolate and fish, and airfares all contributed to the rising prices, with Sanjay Raja, chief UK economist at Deutsche Bank, noting that the former was one of the first commodities to show the impact of the war.
“Energy prices rose substantially with pump prices up just under 8 per cent month-on-month and heating oil prices up a staggering 90 per cent,” he said.
“Food prices were a little stronger than we thought – both processed and unprocessed foods and yoghurt, chocolate, fish all seeing bigger gains than we expected. Services prices also shot up, but only because of airfares, which jumped 10 per cent. Core goods inflation remained subdued on the back of weaker clothing prices, furniture prices, car prices, and IT goods such as software.
“The good news – if any – was that our core services measures, which strip out some of the more volatile elements in the services basket, remained broadly unchanged. And near-term CPI is still expected to take a big step down as base effects drag on the annual rate. The bad news? The drop won’t be as big as we previously anticipated.”
The rise in inflation also means the Bank of England is unlikely to cut interest rates any time soon.
Before the Iran war, it had signalled that it might cut rates two or three times this year from the present 3.75 per cent – though unemployment figures falling in Tuesday’s data at least eases the BoE’s two-way tug-of-war in that regard, as rising unemployment is another reason to cut rates, while inflation is an argument to hike them.
Dropping rates would have led to cheaper new mortgages and lower borrowing costs for businesses.
Emma Wall, chief investment strategist at Hargreaves Lansdown, said: “Inflation is likely to remain elevated in April too, and markets are now pricing in one rate rise later this year, but our house view is that rates are held through the conflict – returning to the expected rate cutting cycle later than forecast just a couple of months ago, but on path to neutral next year.”
While Samuel Fuller, director of Financial Markets Online, warned it was “premature to dismiss the UK’s inflationary threat”.
“This March data only captures the inflationary impact of the first month’s fighting, and April’s data may prove much worse,” he added.
The news on inflation comes amid fears that a further escalation in the Middle East conflict could also impact government borrowing.
The influential Resolution Foundation has found that a “severe but plausible scenario”, in which the conflict intensifies and delivers the largest hits to the economy, would result in government borrowing increasing by £16bn a year in 2029-2030.
RAC data from 16 April showed that the average price of a litre of petrol at UK forecourts was 158.1p, 25p more expensive than when the war began on 28 February.
The average price of a litre of diesel sits at 191.2p, up 49p compared with the start of the war.
Experts at Oxford Economics said they expect the rise in pump prices to add between 0.2 and 0.3 percentage points to the rate of inflation in March.