UK inflation steady pre-Iran war but cost-of-living ‘hump’ on horizon

UK inflation is expected to have been broadly steady last month but experts warn of another “twist” to the cost-of-living story in the months ahead, as war in the Middle East is set to send energy bills soaring.

The rate of Consumer Prices Index (CPI) inflation has been gradually easing back towards the Bank of England’s 2% target level since last summer.

Some analysts are expecting CPI to have held relatively steady in February, or dipped slightly, from the 3% level recorded in January.

Official figures for last month will be published on Wednesday.

Economists for Deutsche Bank and Pantheon Macroeconomics said they are anticipating CPI to hold steady at 3% in February, with lower fuel and services inflation being offset by higher clothes prices and air fares.

Edward Allenby, senior economist for Oxford Economics, said he thinks CPI inflation fell to 2.8% in February, largely thanks to a predicted fall in petrol prices and slower inflation in the services sector.

Analysts for Barclays said they are expecting the headline rate to dip to 2.9%, also partly because of lower pump prices during the month.

But Sanjay Raja, Deutsche Bank’s chief UK economist, said the inflation outlook has “rarely been more uncertain than it is now”.

He wrote in a research note: “We expect the UK’s disinflation story will take another twist on its (eventual) way down to target.

“The good news is that CPI is still expected to slide down in the coming months.

“The bad news? Higher energy prices appear poised to lift CPI meaningfully over summer, adding yet another hump in the inflation profile.”

Economists have been ripping up previous projections in recent days and warning that the US-Israel war with Iran has muddied the outlook for the economy.

The Bank of England said on Thursday recent increases in wholesale energy costs would delay the return of CPI inflation to target, as it was already seeing higher fuel prices.

It is now expecting inflation to be around 3% in the second quarter of 2026, up from the 2.1% that had been forecast in February.

The central bankers stressed the situation is volatile and events over the next six weeks could shed light on the scale of the disruption and impact to prices.

Economists have weighed in with their own projections of where inflation could go if things persist.

Mr Allenby said he is now expecting CPI inflation to exceed 4% during the second half of 2026.

“Under our updated assumptions, we now anticipate a much sharper rise in petrol prices, while higher wholesale gas prices cause a 19% increase in the Ofgem energy price cap in July,” he said.

Pantheon Macroeconomics agreed that, if the latest spike in gas prices is sustained, then CPI could be headed to 4% later this yar.