By Ed Frankl
U.K. inflation climbed in March as the war in the Middle East drove up energy prices, although it is unlikely to prompt the Bank of England to raise its key interest rate at next week's meeting of policymakers.
The annual rate of inflation rose to 3.3% last month from 3.0% in February, the U.K.'s Office for National Statistics said Wednesday, the highest level since December. That matched a consensus of economists polled by The Wall Street Journal.
Before the start of the conflict in the Middle East, the BOE had expected inflation to slow to its 2% target in April, helped by easing wage growth and the removal of charges to fund renewable energy projects.
But the war has upended those forecasts. Prices of Brent crude oil have risen more than 30% and benchmark European natural-gas prices by over 25% since the first U.S.-Israeli strikes on Iran at the end of February. Prices for fuels and lubricants were 8.7% higher in March than February, the largest increase since June 2022, the ONS said.
The war is set to hit the U.K. harder than any other advanced economy, according to forecasts from the International Monetary Fund released last week. The country's higher reliance on gas imports, as well as the expectations of fewer interest-rate cuts this year than before the war, prompted the IMF to lower its forecast for growth this year to 0.8% from 1.3% in its January projections.
Still, the war has affected inflation across economies globally. In the neighboring eurozone, headline inflation jumped to 2.6% in March, above the European Central Bank's own 2% target, from 1.9% in February.
Soon after the start of the war, as markets gauged the effect of higher energy costs, investors expected as many as four interest-rate increases this year from the current 3.75% level. Gov. Andrew Bailey said markets were "getting ahead of themselves", though investors still expect one or two quarter-point rises in 2026, LSEG data shows.
While the bank is expected to stand pat next week, policymakers will be on alert for signs that higher energy costs are leading to bigger wage demands and increased prices for other goods and services.
Core inflation, which strips out more volatile energy and food prices, was 3.1% in March, down from 3.2% in February. However, services inflation rose to 4.5% from 4.3% in February.
"The real difficulty is the second-round effects that they won't really get evidence for until six to 12 months down the line," Jack Meaning, chief U.K. economist at Barclays, said.
That will be when it is clearer if wage growth has started to pick up, and if higher inflation expectations among consumers and businesses translate into higher prices for a wider range of goods and services, Meaning added.
Some rate setters, such as the BOE's chief economist Huw Pill, have suggested that the bank should act quickly to tame price rises before they get out of control. Some analysts say the BOE, as with other central banks globally, acted too late to tame inflation after Russia's full-scale invasion of Ukraine in 2022.
"I'm a little bit skeptical of a line you hear a lot of--wait and see--because I think you have to be clear what you're expecting to see," Pill said Friday.
But other policymakers, such as Columbia University professor Alan Taylor, have suggested the sluggish economy and the weak jobs market before the conflict began meant it was doubtful that rate rises would be needed.
The rise in headline inflation is unlikely to spur the BOE into action next week, Yael Selfin, chief economist at KPMG U.K., said in a note to clients.
"While the bank will closely monitor underlying price pressures over the coming months, the weak state of the economy could temper any significant acceleration in inflation, allowing the Monetary Policy Committee to keep interest rates unchanged in 2026," she said.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
04-22-26 0314ET
