Middle East Conflict Negatively Impacts UK Inflation
Recent data released by the ONS (Office of National Statistics) confirms that inflation in the United Kingdom climbed in March, driven by increasing energy costs as a result of the US/Iran/Israel conflict. The CPI (Consumer Price Index)* increased by 0.03% to 3.30%, increasing from 3.00% from the previous month, with an 8.70% increase in the price of fuel also from the previous month at the petrol pumps, being held up as the culprit.
*CPI – The consumer price index is a key economic indicator that measures the average change over time in prices paid by households for a representative basket of goods and services such as housing, food, transport and healthcare. It is primarily used as an index to measure inflation or deflation.
The increase of 8.70% in the price of motor fuel has been confirmed by analysts as the biggest monthly gain since February 24th 2022, when Russia invaded Ukraine. Analysts also advise that service inflation, which is a key component when it comes to underlying price pressure, also increased from 4.30% to 4.50% in March, largely due to volatility in the price of airfares which jumped 10.00% in the same month. Airlines have been adjusting to these operational challenges by passing on costs driven by a twofold surge in jet fuel prices and the temporary closure of airspace across the Persian Gulf.
The current Middle East crisis has turned inflation forecasts on its head, with the current 53-day war bringing oil and gas exports from the Persian Gulf to a near standstill. Indeed, the conflict has seen the benchmark price of Brent Crude surging more than 55% to just shy of $120p/bl at its peak, from circa $72p/bl on February 27th this year, and it is currently trading today at $99.83p/bl.
Before the conflict, inflation was on track to hit the BOEs (Bank of England) target figure of 2.00%, with promises of more rate cuts, however, analysts suggest that inflation will stay around the 3.00% mark. But, they expect that figure to accelerate at the beginning of Q3, raising the potential for an increase in interest rates. Experts suggest that if the conflict continues, food prices in the UK will be dramatically affected, with food inflation hitting close to 10.00%.
Financial commentators noted that data from the ONS for March confirmed that higher petrol and crude oil prices had increased the costs to businesses for raw materials leaving factories. All in all, the British consumer should brace for an increase in the price of food, petrol and diesel, and more expensive holidays as the country moves towards the summer period.
