UK Inflation Hits 3.3% in March as Iran War Drives Up Fuel Prices

The UK inflation rate increased to 3.3% in the 12 months to March, up from 3% in February, according to the Office for National Statistics. This rise was largely attributed to higher fuel prices stemming from the US-Israel war with Iran, which began on February 28.

Motor fuel prices jumped 8.7% month-on-month, the largest increase since June 2022, and rose 4.9% over the year, the highest annual rise since January 2023. Airfares and food prices also contributed to the uptick, though clothing costs provided some offset by rising less than the previous year.

The data was collected mid-March, several weeks into the conflict, which has disrupted energy production and transportation in the Middle East through missile strikes and drone attacks.

Wholesale energy prices have surged since the war's onset, with economists forecasting UK inflation could peak between 3.5% and 4% this year. This exceeds the Bank of England's 2% target but remains below the double-digit rates seen early in the 2022 Ukraine war.

Higher energy costs are expected to constrain spending by households and businesses, potentially slowing economic growth. The monthly cost of raw materials for businesses and factory gate prices rose substantially, driven by elevated crude oil and petrol prices, the Office for National Statistics reported.

Food inflation increased from 3.3% to 3.7% in the year to March, influenced by rises in chocolate, confectionery, meat, fish, and soft drinks, partly linked to Easter timing.

“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.”

It can take seven to 13 months for cost increases in the food supply chain to reach retail prices. The Food and Drink Federation forecasts food inflation could reach 10% by year's end.

Reeves stated the war is pushing up bills for families and businesses, emphasizing the government's priority to keep costs down and protect against unfair price rises. She highlighted efforts to boost long-term energy security. Shadow chancellor Sir Mel Stride attributed higher inflation to the war but criticized government choices, including tax hikes and energy policies, for increasing economic vulnerability.

He called for cutting benefits, lowering taxes, and new North Sea drilling. Liberal Democrat Treasury spokesperson Daisy Cooper described the war as adding to the ongoing cost-of-living crisis, proposing measures to cut fuel prices, rail fares, and bus prices.

“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.”

The Bank of England's Monetary Policy Committee is set to meet next week to decide on interest rates, currently at 3.75%. Prior to the war, rates were expected to fall this year, but higher inflation has led to speculation they may hold steady or increase.

Ukrainian drones targeted a fertilizer plant in northwest Russia owned by PhosAgro PJSC, as part of intensified attacks on Russia's commodities exporters. These exporters are benefiting from higher prices resulting from the Iran war. One source reported that higher food and fuel prices could persist for more than eight months after the Iran war ends, according to a minister's revelation.

Personal accounts highlight the strain, with a driving instructor in Shoreham-on-Sea noting an extra £100 monthly cost for petrol, impacting maintenance and potentially lesson prices.