The conflict with Iran has undermined expectations of inflation returning to target levels anytime soon.
Source: Office for National Statistics (ONS)
When the Bank of England met in early February this year, it noted: “Although currently above the 2% target, consumer price index (CPI) inflation is expected to ease back towards that level from April, largely due to developments in energy prices, including measures from Budget 2025.”
However, the reference to energy prices was not about oil, which is now dominating headlines. Instead, the Bank was anticipating a fall in the domestic energy price cap from 1 April. This reduction followed the Chancellor’s decision in the November Budget to shift some renewable energy costs from household bills to general taxation for a three-year period.
At the time, Rachel Reeves’ policy was seen as delivering three key benefits:
- cutting the average annual energy bill by around £150 (all else being equal);
- bringing inflation down, offering a boost to the economic outlook; and
- helping reduce government borrowing costs, some of which are linked to inflation.
Yet less than a month after the Bank’s optimistic assessment, the war with Iran began. Oil prices surged, with Brent crude rising from around $70 per barrel in late February to over $110 within a month, before settling at roughly $100 at the time of writing.
The UK’s March inflation data has already reflected the initial impact. Annual inflation rose from 3.0% to 3.3%, with motor fuel prices increasing by 4.9% over the year to March 2026, reversing the 4.6% fall recorded in the year to February. This marked the highest fuel inflation rate since January 2023. Further increases may still be ahead, as March figures were based on average prices of 140.2p per litre for unleaded and 158.7p for diesel.
While inflation is not expected to return to the double-digit levels seen in 2022/23, recent events serve as a reminder that it remains a live risk. For the second time in under five years, it’s clear that inflation has not been tamed and cannot be taken for granted.
22nd May 2026
