War propels UK inflation in new risk for interest rate hikes
Inflation sped up in March, official data has revealed, giving the Bank of England’s Monetary Policy Committee a headache as policymakers mull over whether to raise interest rates.
Inflation jumped to 3.3 per cent last month as President Trump and Prime Minister Netanyahu’s war on Iran led to critical trade disruption across the Strait of Hormuz in the Middle East.
The consumer price index print published by the Office for National Statistics (ONS) matched by City economists in a poll.
It could be the start of a long ascent in inflation rates as the impact of the war and global fuel supply shortages trickles into the UK economy over the coming months.
Core inflation was 3.1 per cent in the year to March while services inflation, which is closely monitored by the MPC for hints of wage growth pressures, inched up to 4.5 per cent compared to a measure of 4.3 per cent in February.
“Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years,” Grant Fitzner, chief economist at the ONS, said.
“Airfares were another upward driver this month, alongside food prices.”
Chancellor Rachel Reeves said her “number one priority” was to “keep costs down”.
“This is not our war, but it is pushing up bills for families and businesses,” Reeves said.
Sir Mel Stride said: “The conflict in the Middle East is increasing inflation – but Labour’s choices have made everything worse and made our economy vulnerable.”
Yael Selfin, chief economist at KPMG UK, said the “weak state of the economy” could prevent a “significant acceleration” in inflation.
She predicted that interest rates would be left unchanged this year.
Interest rates debate heats up
The data will now be analysed by Bank’s rate-setters before a crucial monetary policy decision next week.
City analysts are scratching their heads over what the MPC’s next move might be. A rapid rise in inflation could prompt the Bank to reverse cuts in interest rates seen over the last two years.
Some economists, including those at JP Morgan and the National Institute of Economic and Social Research, expect the Bank to hike interest rates at least once this year in response to the energy price shock.
Others have suggested that the Bank will not raise interest rates while Peel Hunt’s Kallum Pickering has suggested that two cuts could come later this year if disruption in the Strait ends.
President Trump and US negotiators are applying pressure on Iran to accept a deal on the shipping route. The US has blockaded Iranian ports while Iran has attacked some ships passing in the Strait despite a ceasefire.
The government has attempted to find ways to cut bills for households although a full package announcement is not expected to come for weeks.