Official data from the UK's Office for National Statistics (ONS) revealed that the Consumer Price Index (CPI) inflation rate held steady at 3% year-on-year in February, unchanged from January and well above the government's 2% target. The figure was broadly in line with economists' expectations but underscores persistent price pressures in the economy.
The inflation landscape has been fundamentally altered by a recent escalation in the Middle East conflict, which has disrupted global energy supplies and driven up oil and gas prices. The effective closure of the Strait of Hormuz, a key artery for energy shipments, triggered a sharp increase in fuel costs. Grant Fitzner, chief economist at the ONS, noted that falling petrol prices during the February data collection period helped offset increases elsewhere, meaning the full impact of the energy shock is not yet reflected in the official numbers.
Core inflation, which excludes volatile food and energy components, rose to 3.2% in February from 3.1% a month earlier. This increase in underlying price pressures, particularly within services inflation, signals that inflation risks are becoming more entrenched across the broader economy, beyond sectors directly hit by energy costs.
Financial markets reacted swiftly to the data, with traders significantly increasing the implied probability of an interest rate hike from the Bank of England (BoE) at its next Monetary Policy Committee (MPC) meeting. The yield on two-year UK government bonds rose sharply as investors revised their expectations, now pricing in the possibility of rate hikes later in 2025 rather than the previously anticipated cuts.
This shift complicates the policy outlook for the BoE, which had expected inflation to fall back to target in the second quarter. The central bank has already signaled caution, holding interest rates steady at its latest meeting amid intensifying uncertainty. Chancellor Rachel Reeves stated the government remains committed to supporting households while maintaining fiscal discipline, citing measures like a £150 reduction on energy bills and targeted support for heating oil costs.
Analysts warn that with energy prices climbing rapidly in March, upward pressure on inflation is likely to intensify in the coming months, potentially marking the February data as a temporary pause before a more challenging phase for the UK economy.
