UK inflation remained steady at 3% in February, marking the final data point before the outbreak of the Iran war, which has since driven up global energy prices and complicated the Bank of England's monetary policy.
February Inflation Data
- The Office for National Statistics (ONS) reported that the consumer price index (CPI) was unchanged at 3% in February.
- Core inflation, which excludes energy, food, alcohol, and tobacco, increased to 3.2% from 3.1% in January.
- This data covers the period before the U.S. and Israel initiated airstrikes on Iran in late February.
Energy Price Surge from Conflict
- The Iran war has led to an almost total blockade of the Strait of Hormuz, a critical route for Middle Eastern oil and gas.
- Global energy prices have soared as a result.
- The UK is heavily exposed due to its dependence on energy imports and insufficient gas storage facilities.
Bank of England's Response
- The Monetary Policy Committee voted unanimously to keep the benchmark interest rate at 3.75%.
- The BOE stated that the conflict has caused a significant rise in global energy and commodity prices, impacting household fuel costs and business expenses.
- Policymakers warned that CPI inflation will be higher in the near term and are monitoring risks of second-round effects on wages and prices.
Outlook for Inflation and Rates
- Prior to the war, inflation was projected to decline towards the BOE's 2% target, potentially enabling interest rate cuts.
- The energy shock has postponed these expectations; the BOE may hold rates steady or consider hikes.
- The persistence of high energy prices will determine the extent of domestic inflationary pressures.