Rachel Reeves handed nightmare blow as inflation soars | Personal Finance | Finance

UK Inflation rose to its highest level since December after the war in the Middle East sent fuel prices rocketing in March. The rate of Consumer Prices Index (CPI) inflation increased to 3.3% in March from 3% in February, the Office for National Statistics said. This index, which shows how fast the prices are rising or falling in the UK, marks the first dataset since the outbreak of the US-Israel war on Iran on February 28, which first sparked fears of an inflationary shock.

Higher motor fuel was the main driver of the acceleration in inflation, increasing by 8.7% month-on-month – the largest increase since June 2022, shortly after the Russian invasion of Ukraine. Office for National Statistics chief economist Grant Fitzner said: “Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years. Air fares were another upward driver this month, alongside rising food prices.”

He added: “The only significant offset came from clothing costs, where prices rose by less than this time last year.”

It comes after the effective closure of the Strait of Hormuz, which has disrupted energy imports from the Gulf region. As a result, oil prices have risen globally, leading to higher distribution costs that can affect the prices of everyday items, including food.

Chancellor Rachel Reeves said the Iran crisis was “not our war, but it is pushing up bills for families and businesses.”

The rate of inflation is calculated by tracking how prices change on typical household goods and services, which include everything from bread, eggs and milk to hotel costs and restaurants.

March’s 3.3% rise was its highest level since December, which is moving further away from the Bank of England’s 2% target.

However, this is still far below the 11.1% peak triggered in October 2022 after Russia‘s full-scale invasion of Ukraine, which was the highest rate seen in 40 years.

The Bank of England monitors CPI when setting interest rates. If inflation is too high, the Bank may raise interest rates to slow consumer spending and cool the economy, which is good news for savers, but will hit those with variable mortgages and debts.

Jeremy Batstone Carr, European Strategist, Raymond James Investment Services, believed an immediate policy adjustment by the Bank of England later this month was unlikely.

“While opting to hold the base rate at 3.75% in a unanimous decision at its last Monetary Policy Committee meeting, the Bank of England indicated it stands ready to take appropriate action to curb inflationary pressures.

“While financial markets initially interpreted this hawkish shift as an indication that interest rates might be raised as soon as next week, it may still take several months for the anticipated rate hike to materialise.”

Suren Thiru, ICAEW Chief Economist, predicted energy costs and food prices were likely to lift the headline rate above 4% by the autumn, despite slower economic demand.

He said the “disheartening resurgence in inflation confirms stagflation fears” as notable increases in airfares, fuel and food prices triggered by the Iran war drove an unnerving jump in the headline rate.

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