Key Takeaways
- Monthly UK inflation is now at its highest level since December 2025, prompted by a surge in fuel prices because of the Iran war.
- The increase was higher than markets expected, and puts pressure on the Bank of England, which meets next week on interest rates.
- Morningstar’s economist says officials will view the UK inflation surge as transitory.
UK annual inflation rose to 3.3% in March after a surge in oil prices during the Iran war fed through to higher fuel costs at the pump, Office for National Statistics data showed. This is the last inflation data before the Bank of England’s meeting on April 30, although futures markets currently expect no change to interest rates.
The bulletin, which is the first inflation data release from the ONS covering the period following the start of US strikes on Iran in late February, showed a bigger increase in the Consumer Prices Index than FactSet consensus had previously expected. Markets had been expecting an increase to 3.1% and CPI is now at its highest level since December.
Core inflation, a measure of price increases that strips out more volatile food and energy costs, rose by 3.1% in the 12 months to March. This too was above consensus of 3%, though it was still a decrease on the 3.2% recorded for the 12 months to February.
Morningstar economist Grant Slade now expects UK CPI inflation to remain “elevated” in the near term, though he doesn’t think the consequences of the conflict will be significant enough for the Bank of England to raise rates as markets expect.
“We continue to expect the Bank of England will view the reacceleration in price growth as transitory and not raise interest rates this year,” he says.
“The labor market is soft with unemployment resting above its long-term trend, pay growth continuing to slow, and job vacancies remaining scant—as evidenced in the labor market data. In turn, the UK’s weak labor market conditions should limit the the extent of second-order effects from rising energy prices, helping to cushion the economy against a supply‑side shock.”
UK CPI had previously held steady at 3% in the 12 months to February, reflecting no change from the figures for the 12 months to January.
Why Is UK Inflation Rising Again?
In March the price of Brent crude jumped as Iran retaliated against US military action by closing the Strait of Hormuz, sparking a global oil supply shock, and prompting fears that energy importers like the UK would face another inflation surge.
In its bulletin, the ONS said prices in its transport division—and specifically motor fuels—had made the largest upward contributions to CPI in the 12 months to March.
Transport prices rose overall by 4.7%, nearly double the rise of 2.4% recorded in the 12 months to February. The latest annual rate was the highest recorded since December 2022, the ONS said. On a monthly basis, transport prices rose by 2.4% in March alone, compared with a rise of just 0.1% in March 2025—the largest monthly increase since April last year.
Within the transport division, the largest upward effect came from motor fuels, where the average price of petrol rose 8.6p per liter between February and March 2026, ONS said. That compares with a fall of 1.6p per liter seen between February and March 2025.
Though fuel costs made the most significant contribution to price increases overall, increased airfares also played their part, reflecting the specific timing of return long-haul journeys on the Easter weekend. Airfares were up 10% between February and March 2026, compared with a 0.3% fall between February and March 2025.
Will the Bank of England Raise Interest Rates?
Higher-than-expected inflation means the Bank of England now faces a “difficult balancing act,” says Isabel Albarran, investment officer at financial planning firm TrinityBridge.
Though futures markets currently expect one rate hike from the UK’s central bank in 2026, the next decision is not due until April 30, and other factors will affect what the Bank’s Monetary Policy Committee does.
At its previous meeting in March, the BoE opted to hold interest rates at 3.75%.
“Policymakers must weigh the risk of inflation becoming more persistent against the need to support growth in the face of a negative supply shock,” Albarran says.
“This decision is further complicated by February’s stronger-than-expected GDP data, as well as heightened political uncertainty linked to instability within the Labour Party.”
Others caution against rate rises altogether. Quilter investment strategist Lindsay James says increasing rates “risks misdiagnosing the problem.”
“This inflationary pulse is being driven by supply disruption, not excess demand. Higher interest rates will do nothing to increase the flow of oil or other goods from the Middle East,” she says.
The Bank of England has previously said it is ready to act to contain an inflationary spike, and that it now expects UK CPI to rise to around 3.5% in 2026. This quashes its previous prewar projections, which showed inflation falling to the annual 2% target in the first quarter of 2026.
The International Monetary Fund, meanwhile, has said it expects UK inflation to remain above 3% throughout 2026, and that CPI won’t fall back to 2% until the end of 2027. It expects the UK to receive the biggest hit to gross domestic product growth of the world’s largest advanced economies. It says GDP growth is now projected to be just 0.8% in 2026, down from a previous projection of 1.3%.
