By Don Nico Forbes
The U.K.'s annual rate of inflation was unchanged in February, but is set to rise over the coming months as energy and food prices jump in the wake of the U.S.-Israel conflict with Iran.
Consumer prices rose 3.0% on year, in line with January's rise, the Office for National Statistics said Wednesday. This matched a consensus of economists polled by The Wall Street Journal.
Services inflation was 4.3%, down 0.1 percentage point on month, marking its lowest level since March 2022.
But the inflation outlook has soured since the war in Iran caused energy prices to rise.
"The crisis is injecting fresh volatility into energy markets," Joe Nellis, economic adviser at MHA, said.
"Any sustained increase in oil-and-gas costs will quickly ripple through the economy, lifting transport, production and household expenses--threatening spiraling inflation," he said.
Last week, the Bank of England kept interest rates unchanged, opting for a wait-and-see approach as it assesses the impact of higher energy prices on inflation and growth.
It said at the time that inflation would likely rise to between 3% and 3.5% in the coming quarters, well above target.
"I will be monitoring developments extremely closely and stand ready to act as necessary to ensure inflation remains on track to meet the 2% target," the central bank's Gov. Andrew Bailey said.
Consumer prices are now expected to fall only slightly in April as measures to lower household energy bills announced by the government in November come into effect, with inflation set to peak at 3.7% in November, according to Pantheon Macroeconomics.
Before the U.S. and Israel's strikes on Iran, the BOE forecast a fall to 2% in April, with inflation averaging 2.5% over the course of 2026.
At that point, markets widely expected a rate cut in March and further easing over the remainder of 2026. Now the outlook has shifted, with bets rising for a hike in the coming months. As of Friday, the market was pricing in three or four hikes this year.
"We think the market has overshot, but pricing a couple of hikes would not be wildly disproportionate, given that the energy shock could now trigger second-round effects," Pantheon economists said in a note.
Write to Don Nico Forbes at don.forbes@wsj.com
(END) Dow Jones Newswires
March 25, 2026 03:23 ET (07:23 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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