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P.ublished 25th March 2026
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Conflict In The Middle East Is A Potential Game Changer For Inflation
The outlook for inflation has changed markedly. The hit to global energy supply so far from events in the Middle East has been profound and the warnings from the International Energy Agency over its “unprecedented” nature are stark. But the starting point for inflation still matters here. At the outset of the Ukraine war, inflation was already almost 6% and projected to rise above 7%. Inflation is half that level now. Economic conditions are weaker too. Back then, unemployment was below 4% and private sector wage growth elevated at around 5%: they’re now 5.2% and 3.3% respectively. With a considerably weaker demand environment, the need for the Bank of England to lean against second round effects should be lesser.
Ahead of this conflict, public sector borrowing was heading down and there’d been a welcome increase in headroom against the fiscal rules. But this shock – through its impact on inflation and government borrowing costs – could take a chunk out of that headroom. The government is right to have intervened swiftly to support households exposed to a sharp escalation in heating oil costs. And is likewise right to tread carefully in considering further economic support, that would need to be funded through either spending cuts elsewhere, or higher taxes. With the OBR already having issued a warning about UK marginal tax rates and the pace of increase in the tax burden, future support packages will need to be carefully targeted to minimise broader economic pressures.
The spike in energy prices resulting from the conflict in the Middle East is set to worsen cost pressures for UK businesses, which already face the highest industrial energy costs in the G7. While the upcoming British Industrial Competitiveness Scheme will help to reduce energy costs for some manufacturers, it will do nothing to bring down energy prices for the vast majority of UK businesses. More ambition is needed from the government to address the structural reasons why UK industrial energy costs are so high; its current approach of waiting for gas to be displaced such that it no longer drives electricity prices will not help businesses to weather this storm.
“Reading February’s inflation data from the ONS feels like giving the rear-view mirror a cursory glance just as the road ahead takes an unexpected turn.
“Today’s figures show inflation holding steady, maintaining what had been a reassuring drift down towards the Bank of England’s 2% target.
“For households and policymakers alike, this snapshot still largely reflects a world before the recent escalation in the Middle East. The more consequential data will come with March’s release, which may begin to show how rising oil and energy prices are feeding through to UK consumers.
“What today’s data does highlight is how the winds of change can still hinder the trajectory towards the Bank’s target, even before the latest shock. With inflation now likely to move higher in the near term, expectations for further base rate increases will only strengthen.
“Higher rates may offer some support to savers, but rising prices continue to chip away at the real value of cash over time. In a more uncertain and potentially volatile environment, it becomes increasingly important to think carefully about how savings are positioned.
“For some, that may mean considering investments alongside cash savings as part of a longer-term approach, helping to maintain purchasing power over time.”
“Inflation remained elevated in February, broadly consistent with the Bank of England’s projections. However, these data are already old news, as the recent spike in global energy prices due to the Iran conflict means that we expect to see renewed inflationary pressures in the near-term. This could potentially delay the return to 2% inflation until next year, rather than this summer.
“The extent to which inflation will pick up in the coming months will depend on the duration and intensity of the Iran conflict. Households have already seen a rise in fuel pump prices, but a more protracted conflict would result in higher energy bills from July. Food and other goods prices could also see upward pressure due to recent increases in some global commodities prices and disruption in supply chains.
“At this stage, the uncertainty surrounding the extent of the potential inflationary impact of the Iran conflict means that the Bank of England’s Monetary Policy Committee will likely keep rates on hold next month. The bar for hiking rates is relatively high, given weak domestic activity and a cooling labour market, but cannot be ruled out if the situation in the Middle East deteriorates significantly further.”
Trump’s war on Iran may be cause for caution on interest rates, but the Bank of England should not overreact. Alongside Trumpflation, higher interest rates would increase the pressure on families and businesses.
The Bank should remain focused on cutting rates as soon as possible. This will provide important support for economic growth, which is part of the Bank’s remit too.
There are other ways to ease the concerns of financial markets. Governments and central banks should signal that they will act to protect families and businesses, especially with essential energy costs.
Ministers should urgently bring together a taskforce of government, employers and unions to develop contingency plans. That will enable swift action in the national interest if it becomes necessary.