UK Inflation Holds at 3% as Bank of England Warns Iran War Will Push Prices Higher
UK inflation remained at 3% in the year to February 2026, according to the latest figures from the Office for National Statistics, but the Bank of England has warned that the ongoing US-Israel-Iran conflict is expected to drive prices significantly higher in the months ahead.
The Consumer Prices Index (CPI) figure, collected before the full economic impact of the Iran war could be measured, was in line with economists' expectations. However, the Bank of England now projects that inflation will be closer to 3.5% when the March figures are released, as soaring fuel costs and supply chain disruptions feed through to consumer prices.
The Iran War's Economic Impact
The conflict, which began on 28 February 2026 when the US and Israel launched strikes against Iran, has had an immediate and severe impact on global energy markets. The Strait of Hormuz — through which approximately 20% of the world's oil passes — has been effectively closed, with almost all non-Iranian shipping ceasing. The average price of diesel in the UK has surged by 29% to 184.2p per litre since late February, while petrol has risen 16% to 153.7p per litre.
Chancellor Rachel Reeves acknowledged that the war is causing "economic challenges all around the world, with potentially higher inflation, weaker growth and weaker tax receipts." She dismissed reports of a Treasury windfall from oil and gas taxes, arguing that rising government borrowing costs and weaker tax revenues from a slowing economy would offset any gains.
Bank of England Holds Rates
The Bank of England's Monetary Policy Committee (MPC) voted unanimously at its most recent meeting to hold the base rate at 3.75%, citing the likelihood of faster price rises driven by the conflict. This marks a pause in the rate-cutting cycle that began in August 2024, when the Bank started reducing rates from a 16-year high of 5.25%. Six cuts had brought the rate down to 3.75% — the lowest since early 2023 — before the Iran war changed the calculus.
Before the conflict escalated, Bank Governor Andrew Bailey had suggested there could be "scope" for further rate cuts in 2026. The Bank has now warned that approximately 1.3 million more UK households face increased mortgage costs due to the economic shock from the Middle East conflict, and that the UK economic outlook has "deteriorated."
Wages and the Labour Market
The latest official data shows that regular pay grew by 3.8% in the three months to January 2026, slightly outpacing inflation and resulting in real-terms wage growth of 0.5%. However, this was the lowest rate of real wage growth recorded in over five years. The unemployment rate has risen to 5.2%, and the number of job vacancies is falling — trends that will weigh on the Bank's future rate decisions.
Why It Matters
For millions of UK households already stretched by years of high inflation, the prospect of a renewed price surge driven by the Iran war is deeply concerning. The government's five-point plan — including energy bill cuts and a fuel duty extension — provides some short-term relief, but economists warn that the structural impact of a prolonged conflict could be significant.
What's Next
The March inflation figures, expected to show a significant rise, will be closely watched by the Bank of England as it considers its next interest rate decision. The government's ability to manage the economic fallout from the Iran war while maintaining fiscal credibility will be a central test of the Starmer administration in the months ahead.
