Inflation holds, but expected to rise due to Iran war – Daily Business

Inflation remained unchanged at 3% in February but is expected to rise in the months ahead as the war in the Middle East forces up energy prices.

Until the outbreak of hostilities the ?Bank of England had been anticipating prices to fall close to its 2% target in April, when ?changes to regulated household energy bills take effect.

The bank now expects prices to rise towards 3.5% by the middle of the ?year and some analysts have pencilled in 4%, depending on how long the war lasts and what impact it has on world trade.

There is already a certainty that the energy price cap, which comes down next month, will go back up in July and the higher prices of oil and gas are working their way into the supply chain.

The war is also changing forecasts for interest rates with financial markets now looking at a three quarter-point interest rate rise this year, rather than the cuts that had been expected. However, bank governor Andrew Bailey has said the markets should be more cautious over forecasting rate rises.

Since the Iran conflict began, oil prices have increased from around $70 a barrel to more than $117 and this morning Brent crude was trading at $100.

Chancellor Rachel Reeves has insisted she has the “right economic plan” as households brace for a surge in inflation in the coming months as a result of the war in Iran.

She said the government was “taking a responsive and responsible approach to supporting working people in the national interest.”

Stuart Morrison, research manager at the British Chambers of Commerce said:  “For businesses across  the UK, today’s inflation data represents the calm before the storm. 

“UK firms are particularly exposed to the economic impact of the crisis in the Middle East as our electricity prices are tightly tethered to global gas prices. This will feed directly into higher costs and renewed inflationary pressure in the months to come.  

“The cost of living and the cost of doing business are two sides of the same coin. The government must continue to keep all options on the table to help firms deal with rising energy bills. At the same time, tackling other cost pressures, from business rates to national insurance, must remain a key priority.” 

Luke Bartholomew, deputy chief economist, at Aberdeen said: “Today’s inflation report is little more than a relic of the world before the Iran conflict.

“While the February report was broadly in line with expectations, and confirms that inflation was on a path back to 2%, the outlook for inflation has radically changed.

“Yesterday’s PMIs offered the first sign of how much the energy price shock is changing the inflation outlook, and this will start to show up in next month’s data, before building later this year when the energy price cap moves higher.”

Martin Sartorius, lead economist at the CBI, said the Iran conflict “could potentially delay the return to 2% inflation until next year, rather than this summer.”