UK Inflation Stays at Critical 3% Level: Energy Shock Incoming, Rate Cut Expectations May Be Disrupted

Gate News reports that on March 25, the UK Office for National Statistics released data showing that the Consumer Price Index (CPI) rose 3% year-on-year in February 2026, unchanged from January, marking the last inflation reading before the escalation of Middle East conflicts. Previously, markets generally predicted inflation would remain stable, but sudden changes in the energy market are reshaping expectations for the future.

Excluding volatile factors such as energy and food, core inflation increased to 3.2%, slightly higher than the previous figure. Grant Fitzner, Chief Economist at the UK Office for National Statistics, pointed out that clothing prices have become a major factor driving inflation higher, while a decline in gasoline prices has somewhat offset the increase. However, these figures do not yet reflect the impact of the escalation of the Iran conflict and the surge in oil prices.

As transportation through the Strait of Hormuz is disrupted and global energy supplies tighten, crude oil and natural gas prices have risen rapidly. The UK, as a net energy importer, is more sensitive to external price fluctuations, and limited domestic gas storage capacity makes its inflation structure more vulnerable to shocks. The market generally believes that rising energy costs will be passed through household bills and business expenses, pushing up prices in the coming months.

Following the data release, the British pound weakened slightly against the US dollar to 1.3385, indicating market caution about the UK economy’s outlook. Previously, markets expected inflation to gradually fall back to the 2% target within the year, creating room for monetary policy easing.

However, changing circumstances are altering this trajectory. Analysts suggest that the Bank of England may extend the period of maintaining high interest rates; the current benchmark rate of 3.75% is unlikely to be lowered in the short term, and there is even a possibility of further tightening. The central bank has warned that sustained increases in energy prices could trigger a “second-round inflation effect,” where wages and prices push each other higher.

Under these new external shocks, the uncertainty surrounding the UK’s inflation trend has significantly increased, and policymakers need to find a new balance between controlling inflation and avoiding an economic slowdown. (CNBC)