UK inflation holds at 3%, but energy shock resets the outlook

UK inflation held at 3.0% in February, unchanged from January, but the stability looks increasingly misleading. The Office for National Statistics said all motor fuel prices in the release were collected before the outbreak of war in the Middle East on 28 February, meaning the latest CPI print landed before the jump in oil and gas costs feeding through global markets.

CPIH also held at 3.2%, while core CPI edged up to 3.2% from 3.1%. Clothing made the largest upward contribution to the monthly move, partly offset by lower motor fuel prices. Services inflation, closely watched by the Bank of England as a gauge of domestic price pressure, eased to 4.3%, its lowest since April 2022.

That leaves Threadneedle Street facing a harder policy problem than the headline number suggests. Holding Bank Rate at 3.75% on 19 March, the Monetary Policy Committee said CPI inflation “will be higher in the near term as a result of the new shock to the economy”. The Bank noted Brent crude had risen above $100 a barrel ahead of the meeting, around 60% higher than at the time of its February Report, while UK gas futures that feed into the next Ofgem cap had climbed by 35% to 40%.

There is a near-term wrinkle. Ofgem’s price cap for April to June, already set before the latest wholesale spike, will fall by 7% to £1,641 a year for a typical dual-fuel household paying by direct debit. But the Bank said that if current wholesale conditions persist, higher gas prices are likely to feed mechanically into a higher cap from July. Its staff estimate the direct contribution of energy prices to CPI in the third quarter at around three-quarters of a percentage point, with indirect pass-through from business costs able to add further pressure.

That matters well beyond household bills. Citi/YouGov data published this week showed short-term public inflation expectations jumping to 5.4% in March from 3.3% in February, with longer-term expectations also rising. At the same time, the CBI said its retail sales balance fell to -52 in March from -43 in February, the weakest reading since April 2020, underscoring how little room households have to absorb another cost shock.

Business surveys are already showing the first signs of repricing. S&P Global’s latest PMI showed UK manufacturers suffered the sharpest one-month acceleration in cost inflation since the aftermath of Black Wednesday in 1992, as higher fuel, transport, and energy-intensive raw material costs hit margins. For businesses, the February inflation data therefore read less as reassurance than as a cut-off point: domestic price pressures had been easing, but companies now face a tougher mix of rising input costs, a more uncertain rates path, and a consumer backdrop that was already softening before energy markets turned again.