The UK inflation rate rose to 3.3% in the year to March, after the US-Israel war with Iran caused the largest jump in petrol and diesel prices in over three years.
The rise from 3% in the year to February was “largely due to increased fuel prices”, while airfares and food also contributed, the Office for National Statistics (ONS) said.
The figures provide the first official look at the impact of the Middle East conflict on the cost of living in the UK.
Inflation is now expected to be higher this year due to the war, and higher energy costs could also slow down the economy as people and businesses have less money to spend.
Inflation could peak around 3.5% to 4% this year, economists have predicted. This would be higher than the Bank of England’s target of 2%, but much lower than the double-digit rates seen early on in the war in Ukraine in 2022.
Wholesale energy prices have soared since the Iran war began on 28 February, with the production and transportation of energy across the Middle East slowing or stopping entirely due to missile strikes and drone attacks.
The ONS collected its March data in the middle of the month, a few weeks into the war.
Motor fuel increased by 8.7% month-on-month, the largest increase since June 2022, shortly after Russia’s full-scale invasion of Ukraine.
Over the year to March, fuel prices rose by 4.9%. This was the highest rise since January 2023.
In addition to fuel, ONS chief economist Grant Fitzner said airfares and rising food prices also played a part, while “the only significant offset came from clothing costs, where prices rose by less than this time last year”.
“The monthly cost of both raw materials for businesses and goods leaving factories rose substantially, driven by higher crude oil and petrol prices,” he added.
The rise in airfares was largely due to the relatively early timing of Easter this year – the long-haul flights monitored by the ONS had a return date of the Tuesday after the Easter weekend and were recorded before the Iran war started.
Food inflation rose from 3.3% to 3.7% in the year to March, driven by chocolate and confectionery, meat, fish, and soft drinks – which may also be linked to the timing of Easter.
It can take about seven to 13 months for cost increases in the food supply chain to be reflected in retail prices on the supermarket shelves.
The Food and Drink Federation, which represents manufacturers, forecastsfood inflation could be as high as 10% by the end of the year.
Before the war, interest rates as set by the Bank of England had been expected to fall this year. However the threat of higher prices has prompted speculation the Bank will hold rates steady or even increase them.
When inflation runs higher central banks usually raise interest rates to reduce demand. But when economic activity slows, they usually lower interest rates to encourage borrowing and spending.
Higher energy prices due to the war could both boost prices and also make households and businesses pull back on spending, which would make the Bank of England’s job harder.
Its Monetary Policy Committee will meet next week to decide whether to change the rate from its current 3.75% level.
Chancellor Rachel Reeves said: “This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down.
“Our economic plan is the right one and has put us in a stronger position to support families in the face of this new crisis.”
She added that the government would “protect people from unfair price rises if they occur to bring down food prices at the till”, and was boosting long-term energy security.
Shadow chancellor Sir Mel Stride said the war was causing higher inflation “but Labour’s choices have made everything worse and made our economy vulnerable”.
“Tax hikes, reckless spending and disastrous energy policies have left Britain exposed,” he said, calling for the government to cut the benefits bill, lower taxes, and for new North Sea drilling.
Liberal Democrat Treasury spokesperson Daisy Cooper said the Iran war had added to the “devastating cost-of-living crisis” people have been struggling with for years.
“It’s only the Lib Dems with a real plan to protect people from Trumpflation and cut fuel prices, rail fares and bus prices, bringing down the cost of living and protecting British families,” she said.
Adam Deasy, an economist at PwC UK, said: “This is just the first wave of the energy shock, primarily showing up in higher prices at the pump.
“We are yet to see the knock-on impact of price pressures in downstream or byproducts to oil and gas, such as fertiliser, helium, plastics or metals.”
‘When is this going to stop?’
Driving instructor Joe Pearson, who teaches in Shoreham-on-Sea in Sussex, said a tank of petrol is costing him an extra £100 a month.
“When is this going to stop?” he asked. “It was pretty much every other day, pulling into the petrol station and seeing it had gone up again.
“It also has an impact on things like service, maintenance, tyres – because, of course, there’s delivery costs, which are passed on to us as instructors.”
He said he has “thankfully” not yet had to pass the extra cost on.
“If it was to keep going up at the rate it has, then I would have to consider it, but at the moment I’m really trying to keep a lid on it as much as possible,” he said.
Source: BBC
