UK inflation set to rise as Iran war pushes energy costs higher

The conflict in Iran has driven up global oil and gas prices, creating renewed upside risks for UK inflation. Although April’s consumer price figures showed a temporary deceleration, economists warn the energy shock is likely to push headline inflation back above the Bank of England’s 2% target later in the year.

Official data from the Office for National Statistics (ONS) recorded a fall in annual CPI to 2.8% in April from 3.3% in March, helped by smaller household energy and regulated bill increases and targeted government measures. Yet central bank and market estimates now incorporate scenarios where sustained energy price pressure raises inflation well beyond the Bank of England’s baseline. The BoE has outlined scenario analyses showing materially higher peaks if energy costs remain elevated.

Markets have reacted to the shifting outlook: sterling dipped briefly after the CPI release before stabilising, bond yields rose and investors trimmed bets on near-term rate cuts. The BoE left Bank Rate at 3.75% at its April meeting but signalled readiness to act if second-round effects from the energy shock take hold, with some members favouring earlier tightening. These dynamics are influencing gilt yields and short-term rate expectations in swap markets.

The UK’s vulnerability reflects its energy mix and limited gas storage capacity relative to key European peers, meaning global disruptions transmit quickly to domestic prices. Quarterly price-cap mechanisms and fiscal support have provided temporary relief for households, but the timing of the observation windows means future caps could incorporate the current surge, pushing bills and headline inflation higher. Policy choices will therefore depend on how persistent the price shock proves to be.

Looking ahead, forecasters present a spectrum of outcomes: from modest and transient increases to scenarios where inflation could rise to the mid-single digits if energy prices stay high. Some market estimates and commentaries even highlight risks of inflation approaching or exceeding 5% under sustained pressure, prompting calls from hawkish BoE voices for precautionary rate moves. Key indicators to watch are forthcoming CPI releases, wage growth and energy price developments, which will shape the BoE’s timing and magnitude of any response.