February inflation remains steady at 3% ahead of predicted surge

UK CPI inflation came in at 3% in February, the same as January's figure of 3%, the latest ONS statistics show.

However, in the past month the ongoing conflict in West Asia has pushed up oil prices, with inflation widely expected to reach 4% over the coming months as financial markets react sharply to the changing global outlook. 

The Bank of England held interest rates at 3.75% last week, with the Monetary Policy Committee stating: "Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs. CPI inflation will be higher in the near term as a result of the new shock to the economy."

Markets are now pricing in the possibility of multiple interest rate increases this year, with some predicting up to four rises - around 1% - before the end of 2026.

Luke Bartholomew, deputy chief economist at Aberdeen, said: “Today’s inflation report is little more than a relic of the world before the Iran conflict. While the February report was broadly in line with expectations, and confirms that inflation was on a path back to 2%, the outlook for inflation has radically changed. Yesterday’s PMIs offered the first sign of how much the energy price shock is changing the inflation outlook, and this will start to show up in next month’s data, before building later this year when the energy price cap moves higher. 

"Clearly the Bank of England is worried about inflation. And while the underlying weakness of the economy means rate cuts would be painful, policymakers may decide they do not have the luxury of “looking through” higher inflation, especially if the conflict does last longer than the market currently seems to be hoping.” 

Charlie Ambler, co-chief investment officer at Saltus, commented: “While we expected February’s inflation data to remain stable around 3%, increasing oil prices are widely expected to push up the headline rate of inflation to near double the 2% target later this year, threatening the Bank’s slow and steady rate cutting cycle and frustrating markets. Should this materialise, markets are unlikely to respond well.

“While the Bank of England has signalled a cautious and data dependent approach to monetary policy, resulting in a hold at 3.75% last week, financial markets have already reacted sharply to the changing global outlook. Investors are now pricing in the possibility of multiple interest rate increases this year, with some expectations pointing to as many as four rises before the end of 2026. The gap between market expectations and the Bank’s own guidance highlights just how uncertain the inflation outlook has become.”

Derrick Dunne, CEO of YOU Asset Management, added: “These latest data from the ONS are possibly the most unhelpful in recent history and we all know the reason why. They capture the precise point in time before which the conflagration in the Middle East began and do nothing to help us understand the pressure households will now be facing as prices skyrocket at forecourts across the UK.

“Further, because of the intricacies of the energy price cap we won’t know the true extent of the damage to the economy for some time – nor will headline inflation reflect the problem properly until the Summer at least.

“What is clear though is rates are not going to fall until we know more. There are now some indications the crisis might be entering a negotiated end game – but that is by no means guaranteed.

“Ultimately the Bank of England has a job to balance its mandate to control inflation against economic problems such as employment and GDP which are not its primary role. There is a rising chorus calling for rate setters to look through the coming energy price shock.

“This is because the shock is outside of its control, households are already under pressure on day-to-day spending and excess savings have been whittled down by the past few years. To hike into this would guarantee an economic downturn simply because the economy cannot tolerate the level of rate we’re at, no matter what external energy prices are doing."