UK inflation steady at 3% in February ahead of energy shock from Iran conflict

Inflation in the UK remained unchanged at 3% in the year to February, providing a brief period of stability before economists expect a renewed rise in price pressures driven by the Middle East conflict.

Figures from the Office for National Statistics (ONS) show that annual inflation has held steady following months of gradual decline, with rising clothing prices offset by lower fuel and alcohol costs.

However, the data was collected before the escalation of the US-Israel conflict with Iran, an event that has already caused a sharp increase in global energy prices and is widely expected to lead to higher inflation in the coming months.

The biggest upward pressure on inflation in February came from clothing and footwear, where prices rose 0.9% over the year. This marked a reversal from the previous month, when commodity prices showed no signs of rising.

ONS chief economist Grant Fitzner said the rise reflected seasonal price volatility, but also highlighted the volatility within the inflation basket.

“At the same time, lower fuel costs and lower alcohol consumption have helped moderate some of these increases,” he added, noting that alcohol and tobacco inflation has reached its lowest level since early 2022.

Although fuel costs helped control inflation in February, that trend has begun to reverse.

The ONS reported that petrol prices were at their lowest level since June 2021 at the time of data collection, with prices averaging 131.6p a litre. Since then, wholesale oil prices have risen, causing pump prices to rise significantly.

The price of crude oil has risen sharply following the disruption of global supply lines and shipping lanes, especially through the Strait of Hormuz – an important artery for global energy markets.

This change is expected to have a negative impact on the entire economy, increasing the cost not only of transportation but also of manufacturing, food production and leisure facilities as businesses pass on higher input costs.

For many companies, the impact is already being felt.

James Palmer, who runs the Essex bus company, said fuel costs had risen sharply in recent weeks, creating uncertainty and forcing tough decisions.

“Three weeks ago we were paying around £1.21 a litre, now it’s close to £1.86,” he said, highlighting the speed of the increase. Coupled with rising wage costs, he warned that price increases for customers are inevitable.

“It’s a worrying lack of confidence,” he added. “We don’t want to embarrass people, but we may not have a choice.”

Economists expect inflation to rise sharply through 2026, with some forecasts suggesting it could rise to around 4.6% if prices continue to rise.

This may represent a reversal of the recent trend of deflation and may complicate the monetary policy decisions of the Bank of England, which was previously expected to start lowering interest rates.

Instead, markets are now pricing in the possibility of a rate hike to contain inflation, a move that would put more pressure on households and businesses.

The inflation data also comes as wage growth shows signs of slowing. Earnings excluding bonuses rose 3.8% year-on-year, which is ahead of inflation for now, but is at risk of being overtaken if inflation accelerates.

A renewed squeeze on income could weigh heavily on consumer spending, slowing economic growth.

Chancellor Rachel Reeves said the government was taking steps to reduce the cost of living, including measures to freeze food prices and improve long-term energy security.

However, economists warn that global factors, particularly energy markets, may limit the effectiveness of domestic policy interventions.

February’s inflation figure represents a moment of calm ahead of what could be another period of turmoil.

With energy prices rising, supply chains under pressure and interest rate expectations changing, the UK economy is facing a critical balancing act, where inflation, growth and living standards are all tightly linked.

For now, inflation may be stable. But the forces shaping their next move have already begun to move.