UK Inflation Stayed at 3% in Weeks Leading Up to Iran War
(Bloomberg) — UK inflation held at an 11-month low before the war in Iran sent motor fuel costs soaring and threatened to deliver another shock to household finances.
Consumers price growth stayed at 3% in February, the Office for National Statistics said on Wednesday. It was in line with economists’ expectations for an unchanged reading.
The ONS said motor fuel costs were among the biggest drags, a factor that quickly went into reverse when the conflict in the Middle East drove up oil prices to more than $100 per barrel. The pound held losses against the dollar, to trade 0.25% lower at $1.3376.
February’s figures have been overshadowed by conflict in the Middle East upending the outlook for inflation and prompting traders to bet on the Bank of England turning to interest-rate hikes to stop a feedback loop in prices. Bloomberg Economics estimates that inflation will be about a percentage point higher by the end of the year because of the war’s impact on energy markets.
“A few weeks ago, this would have represented a steady reading, and another step along the path back to target,” said Adam Deasy, economist at PwC UK. “Now, we are facing an energy-shock-shaped bump in the road.”
Wednesday’s figures showed inflation was broadly on track with where the BOE had expected ahead of the war. It had predicted inflation would fall to around its 2% target in the spring, forecasts that quickly became outdated once turmoil hit energy markets.
The ONS said services inflation — which is watched for signs of domestic price pressures — cooled slightly to 4.3% in February, the lowest since March 2022.
Prices at the pumps for UK drivers fell 1.1% in February in contrast to a 1.5% increase in the same month a year earlier. There was also a downward effect from cheaper alcohol as a result of price discounting. Clothing and footwear pushed up on inflation, as prices rose 0.6% versus a 0.3% fall in February 2025.
The UK central bank expects a surge in petrol prices to immediately push up inflation to 3.5% in March before gas and electricity bills climb when the UK’s energy price cap is updated in the summer. There are also signs the shock is rapidly feeding through to businesses with manufacturers suffering the sharpest pick-up in cost pressures in over three decades in March.
The latest geopolitical crisis will evoke painful memories on Threadneedle Street after it struggled to contain the energy price shock caused by Russia’s invasion of Ukraine in 2022. Last week the Monetary Policy Committee said it “stands ready to act” with even one of its most dovish rate-setters warning that hikes are on the cards in a prolonged energy price surge.
Traders are betting on the BOE raising interest rates at least twice this year — a reversal of the cuts predicted before the war when officials had expected inflation to fall to their 2% target in the spring.
What Bloomberg Economics Says…
“UK inflation remained a full percentage point above the Bank of England’s target in February. The outlook from here has been reshaped by the war in the Middle East. Uncertainty is high, but based on energy futures pricing as of close on March 24, we think inflation is likely to remain closer to 3% than 2% – which was our pre-war view – over the rest of the year. We think the BOE will keep rates steady in response. The clear risk is that the central bank instead concludes the most credible policy response is to preemptively tighten to anchor inflation expectations.”
—Dan Hanson and Ana Andrade, economists. Click to read the REACT on the Terminal
Prime Minister Keir Starmer said on Monday he is looking at measures to aid Britain’s economy and sectors hardest hit by the war. A renewed cost-of-living crisis risks damaging the Labour government’s already low standing in opinion polls with Chancellor of the Exchequer Rachel Reeves looking at clamping down on firms using the war as an opportunity to hike prices unjustifiably.
–With assistance from Joel Rinneby, Mark Evans, Sylvia Westall, Irina Anghel and Andrew Atkinson.
©2026 Bloomberg L.P.
