The UK is facing renewed pressure on household finances as UK inflation rises to 3.3%, driven largely by surging fuel prices linked to the Iran war. New data from the Office for National Statistics (ONS) shows the consumer prices index (CPI) increased from 3% in February to 3.3% in March, marking a significant jump in the cost of living.
The latest figures provide the first official snapshot of how the US-Israel conflict with Iran is impacting the UK economy, with rising energy and transport costs feeding through into broader inflation.
Fuel prices and transport costs drive inflation higher
According to the ONS, the main driver behind the increase in inflation was a sharp rise in petrol and diesel prices, which have surged since the outbreak of the Middle East conflict. Global oil prices have climbed close to $100 a barrel following disruptions to supply routes, particularly through the Strait of Hormuz, a key artery for global energy shipments.
Grant Fitzner, chief economist at the ONS, said inflation climbed largely due to increased fuel costs, alongside rising air fares and food prices. Transport costs overall rose by 4.7% in the year to March, nearly doubling from 2.4% in February and reaching the fastest rate since late 2022.
Petrol prices rose by 8.6p per litre to 140.2p, the highest level since August 2024, while diesel increased by 17.6p per litre to 158.7p, the highest since November 2023. These increases are placing additional strain on households already dealing with broader cost of living pressures.
Food prices and household bills add to pressure
Food inflation also accelerated, rising from 3.3% to 3.7%, with notable increases in chocolate, confectionery, meat, fish and soft drinks. Industry experts warn that food prices could rise further in the coming months due to supply chain disruptions linked to the conflict.
The Food and Drink Federation has predicted that food inflation could reach as high as 9% by the end of the year, particularly if disruptions to fertiliser supplies persist.
While clothing prices provided a slight offset to overall inflation, the broader trend indicates that essential living costs are continuing to rise, affecting both consumers and businesses.
Economic outlook and policy challenges
The UK’s inflation rate remains well above the 2% target set by the Bank of England, which has already warned that prolonged geopolitical instability could lead to further increases in borrowing costs.
Although inflation had been expected to fall sharply in April due to government measures announced by Chancellor Rachel Reeves, including energy bill support, economists now believe the Iran war will offset much of that decline.
The Bank of England has so far held interest rates steady but signalled that further increases may be necessary if inflationary pressures persist. Financial markets are currently pricing in at least one rate rise later this year, although policymakers are expected to proceed cautiously given the fragile economic outlook.
Core inflation, which excludes volatile items such as energy and food, eased slightly to 3.1% from 3.2%, suggesting underlying pressures may be stabilising. However, economists warn that external shocks could quickly reverse this trend.
Global context and recession risks
The International Monetary Fund (IMF) has warned that the UK faces one of the sharpest growth slowdowns among G7 economies this year, alongside one of the highest inflation rates. The combination of rising prices and slowing growth raises concerns about the risk of stagflation.
Martin Beck, chief economist at WPI Strategy, said future inflation levels will depend heavily on developments in the Middle East. If tensions ease and energy supplies stabilise, inflation could peak between 3.5% and 4% this summer. However, further escalation could push inflation towards 5%, intensifying the cost of living crisis.
Households are also bracing for additional increases in energy bills later in the year, when the next update to the Ofgem price cap takes effect. This could further strain budgets and reduce disposable income.
Energy shocks and UK inflation trends
The current surge in inflation echoes previous energy-driven spikes, such as the 2022 crisis following Russia’s invasion of Ukraine. However, the latest shock comes at a time when the UK economy is still recovering from pandemic-related disruptions and facing ongoing structural challenges.
The Strait of Hormuz, through which a significant portion of global oil and gas flows, remains a critical factor in determining energy prices. Any prolonged disruption to this route has immediate consequences for global markets and domestic inflation.
As the situation evolves, the UK government faces the challenge of balancing support for households with maintaining fiscal stability, while the Bank of England must navigate the difficult task of controlling inflation without stifling economic growth.