Energy prices may push UK inflation higher soon
Britain’s consumer price inflation remained steady at 3.0% in February, unchanged from January, according to official data released Wednesday. However, economists warn inflation could soon climb as escalating tensions in the Middle East drive oil prices significantly higher.
The Office for National Statistics (ONS) reported that lower petrol prices helped balance increases in clothing costs during February. But this relief may be temporary, as oil prices have surged roughly 50% over the past month, raising concerns about rising energy costs feeding into inflation in the months ahead.
Luke Bartholomew, deputy chief economist at Aberdeen, said the latest inflation data reflects conditions before the Iran conflict intensified. Prior to the late-February U.S.-Israeli strike on Iran, the Bank of England expected inflation to fall closer to its 2% target in April, when changes to regulated energy bills were scheduled to take effect.
However, the Bank of England has since revised its outlook, now predicting inflation could rise toward 3.5% by mid-year, largely due to higher energy prices.
Public Expectations Rising 📊
A survey released Tuesday by Citi showed British households’ expectations for inflation over the next year have jumped sharply to 5.4%, up from 3.3% — the largest monthly increase in more than two decades. This increase highlights growing concern among consumers about the cost of living.
Although most household energy prices are currently capped, new tariffs are set to take effect in July. Meanwhile, manufacturers have reported their largest cost increases since 1992, raising the likelihood that higher production costs will soon be passed on to consumers.
Financial markets currently anticipate two or three interest rate increases from the Bank of England this year. Still, many economists believe policymakers may hesitate to raise rates because higher energy costs could weaken economic growth. Governor Andrew Bailey has cautioned against assuming rate hikes are guaranteed.
Mixed Signals in Underlying Inflation 🔎
Services inflation — closely monitored by the Bank of England as an indicator of long-term price pressures — fell slightly to 4.2% in February, down from 4.4% in January, marking its lowest level since March 2022. Lower price increases for restaurants, cafes, and entertainment tickets contributed to the decline.
However, core inflation, which excludes volatile items such as food and energy, edged up to 3.2% from 3.1%, indicating persistent underlying inflation pressures.
Zara Nokes of J.P. Morgan Asset Management said the rise in core inflation would concern policymakers, as it suggests inflation remains difficult to bring down even before factoring in higher energy prices.
Ongoing Cost-of-Living Pressures ⚡
The UK continues to face higher inflation than most advanced economies, partly due to its heavy reliance on natural gas for electricity and heating. The government of Prime Minister Keir Starmer has introduced measures aimed at limiting the impact of rising living costs.
Finance Minister Rachel Reeves indicated that any new energy subsidies would be more targeted than the broad support measures introduced during the 2022 energy crisis. She also highlighted upcoming policy changes intended to reduce fixed household energy expenses and promised action if unfair price increases occur.
Inflation in the UK reached 11.1% in October 2022, its highest level since 1981, and has remained above the Bank of England’s 2% target for most of the past five years.
