Inflation in the United Kingdom climbed to 3.3% in March, marking its highest level since December, as the knock-on effects of the Iran conflict began impacting household costs. The Office for National Statistics reported the annual Consumer Prices Index (CPI) inflation rate increased from 3% in February, with higher fuel prices being a significant driver.
What is inflation?
Inflation describes the rising price of goods and services. The inflation rate indicates how quickly prices are increasing. March's rate of 3.3% means an item costing £100 a year ago would now cost £103.30. This pace is unchanged from the previous month.
What caused the increase?
The main factor behind the uptick was higher fuel prices. Motor fuel prices jumped 8.7% month-on-month, the largest increase since June 2022, shortly after Russia's invasion of Ukraine. The conflict between US-Israeli and Iranian forces since late February has disrupted energy production and transportation through the Strait of Hormuz, pressuring oil and gas supply and driving prices higher. The average petrol price rose 8.6p per litre to 140.2p, the highest since August 2024. Diesel prices increased 17.6p per litre to 158.7p, the highest since November 2023.
Air travel costs also contributed, with air fares rising 14.5% year-on-year, partly due to the early Easter holidays. Food and drink inflation accelerated, driven by monthly increases in chocolate, coffee, and fresh fish.
Are any prices falling?
Despite the overall rise, some categories saw declines. Clothing and footwear prices dipped 0.8% month-on-month, with sales and discounting pushing inflation in this category to its lowest since March 2021. Some food items like bacon, cheese, and bread also fell month-on-month in March.
Will the Iran war cause further inflation?
The ONS noted that fuel prices already reflect the conflict's impact. While jet fuel costs have risen, air fares in March were based on previously booked flights, so further increases are expected as higher jet fuel costs are passed on. Cornwall Insight predicts household energy bills will rise by around 12% in July due to the conflict, though April bills fell by an average of 7% due to a previously announced cap.
How high could inflation go?
Inflation likely dipped in April due to the lower energy price cap. Adam Hoyes of Rathbones predicts it will slow to 3% next month. However, it is expected to resume an upward trajectory as more conflict-linked price increases feed through. Matt Swannell of ITEM Club forecasts inflation could rise to close to 4% in the second half of 2026 before easing. Others are more cautious; ING's James Smith estimates it could peak around 3.5%.
What does this mean for interest rates?
The Bank of England last month held interest rates at 3.75%, citing uncertainty from the conflict. Higher rates are typically used to curb demand and control inflation, targeting a 2% rate. The Monetary Policy Committee (MPC) will vote on rates next week. Rob Wood of Pantheon Macroeconomics says current projections are not high enough to prompt an immediate rate hike. Investec's Philip Shaw suggests the Bank could hold rates steady, with potential cuts in early 2027.
