UK inflation forecast: where are prices heading next?
UK inflation remained at 3% in February, but with conflict in the Middle East threatening the British economy, will price growth fall further in 2026?
Experts fear the Iran war has scuppered hopes that inflation will return to the 2% target in 2026 as some forecasters now expect inflation to stay north of target until at least the end of this year.
The latest inflation data available shows inflation remained at 3% in the year to February, the same level it was in January.
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To see that data, we will have to wait for March’s inflation figures, due to be published on 22 April.
Most economists expected inflation to reach 2% in the second quarter of the year, but the threat of soaring oil and natural gas prices mean the UK inflation rate is now forecast to rise this year – possibly to 3.5% or more.
There is some good news though. On the evening of 7 April, a two-week ceasefire between the US and Iran was announced, subject to the Strait of Hormuz, a naval passageway between Iran and Oman through which around 20% of the world’s oil is transported, being opened.
Where has inflation gone recently?
At the start of 2025, inflation fell close to the Bank of England’s 2% target but quickly rose to a high of 3.8% by July. Inflation stayed at this level between July and September, then fell in October and November.
But this trend of either plateauing or falling inflation was bucked in the final month of 2025, when December’s data showed price growth rose to 3.4%.
January and February’s data seem to support the case economists were making that inflation would sustainably fall through 2026 and reach the 2% target this year.
However, as the economic impact of the Iran war has become clearer, experts have changed their predictions.
Where will inflation go next?
In the minutes of the March meeting of the Bank of England’s Monetary Policy Committee (MPC), the committee said they expect inflation to reach 3.5% in the third quarter of the year, as the new energy price cap is predicted to significantly increase average energy bills.
The minutes said: “Based on the oil and gas futures curves as of 16 March, Bank staff projections suggested that the direct contribution of energy prices to CPI inflation in 2026 Q3 would be around ¾ percentage points.”
They noted that higher energy prices will not only sting customers when paying their own bills, but that they expect firms to pass their own increased energy costs onto consumers.
The expectation that inflation will peak at 3.5% this year is shared by Deutsche Bank. Sanjay Raja, chief UK economist at Deutsche Bank, said: “The UK’s inflation story is set to take another painful turn [this year]. A return to the Bank’s 2% target now looks like a distant memory.”
This is partially driven by the rising price of fuel. Petrol and diesel prices have soared since the conflict, with data from the RAC showing the price of a litre of petrol has risen by 24.9p since 28 February, while diesel has risen by 48.2p.
Household energy prices are also expected to rise, contributing to inflation.
But Raja added that these are not the only markets seeing prices rise. He said there is a risk that the turmoil will spill over into other parts of the CPI basket, “with fertilizer prices on the rise, shipping costs surging, and the prospects of second-round effects no longer negligible”.
A slightly more pessimistic forecast has been made by consultancy Oxford Economics, which suggests inflation could reach 4% again in the second half of the year before cooling in 2027. The lion’s share of the rise will come from increased petrol and energy prices.
Moreover, the firm expects a larger rise in inflation over the next year to hit economic growth, resulting in a more pronounced slowdown in activity growth.
Edward Allenby, senior economist at Oxford Economics, said: "Higher fuel and energy costs, as well as the upward pressure these will have on other prices, point to a greater squeeze on real household incomes.
“Therefore, we now project GDP growth of 0.4% this year and 1% next year, compared to our February baseline of 0.9% in 2026 and 1.3% in 2027, respectively."
Why does war in Iran mean higher inflation in the UK?
The main way UK inflation is likely to be affected by the war is through rising prices for products exposed to the oil markets. We have already seen this happen in some markets, with the prices of motor fuel, energy, and heating oil soaring.
Price shocks could be more widespread too as a significant proportion of the things we use and buy daily are derived from oil, or use it when they are being produced – this includes goods as varied as plastic, crayons, shoes, backpacks, iPhones, pillows, and much more.
As so many of the goods we consume are exposed to the oil market, fluctuations in the price of oil tend to have a significant effect on inflation. Broadly speaking, each $10 rise in the price of a barrel of oil typically translates into a 0.1 percentage point rise to CPI inflation.
The area where the UK is particularly exposed to economic shocks is in the increased price of wholesale energy, which manifests itself to consumers in the form of higher energy bills.
Energy consultancy Cornwall Insight said the energy price cap could rise by 20% in July if the conflict continues to wreak havoc on global energy supply lines.
The UK is so sensitive to the wholesale energy market because it is a net importer of energy from overseas, meaning we are left at the whim of the market to set prices.
Moreover, even firms that do not produce goods derived from oil and gas markets will likely need to hike prices as the costs associated with running the business (energy bills, transportation costs, etc.) are still exposed to those markets. These costs will likely be passed on to the consumer.
What would an Iran ceasefire mean for UK inflation?
A ceasefire would be good news for the global economy, allowing global supply lines to at least partially open up again.
The most important aspect of this is ensuring safe passage through the Strait of Hormuz for the ships that have been marooned in the Persian Gulf since the war started.
These ships mostly carry oil (around 20% of the world’s oil goes through the strait), but vessels carrying other goods like fertiliser have been stuck in the gulf too.
With the oil supply opening up again, prices will likely fall. Indeed, in the hours after the ceasefire was announced, the price of Brent Crude oil dipped to around $94 on 8 April, down from the around $110 it was sitting at the day before.
However, a lot will depend on how long hostilities are paused for, and how much traffic is allowed through the strait.
The ceasefire that has currently been agreed to between the US and Iran will last two weeks if neither party breaks the terms, but what happens after this is still up in the air. Negotiations are set to be held between the US and Iran on 10 April which may yield a peace deal – equally, they may not.
A ceasefire that does lead to some lasting peace would be good news for the global economy, as ongoing disruption from a lasting conflict would be limited.
That being said, some damage has already been done.
A research note circulated by investment bank Peel Hunt said: “Even if the truce marks a genuine end to the fighting, some economic damage is already baked in.”
Higher inflation in the second half of the year can be expected, as well as slower growth for major parts of the global economy, the note said.
For the UK, much of this inflationary damage will come from the rising price of motor fuel and household energy.
Dan Coatsworth, head of markets at investment platform AJ Bell, said: “A lower oil price means the foot has been taken off the inflation pedal somewhat, but it doesn’t mean that inflation is no longer a problem.
“Consumers are already feeling the pain of higher oil prices when filling up their car or booking a flight, and the energy spike has gone on long enough to suggest more price hikes are coming on everyday items.
“Today’s retreat in the oil price is not deep enough to suggest that an inflation shock will be short-lived. Life is likely to get more expensive in the coming months, with or without a ceasefire. It’s just impossible to predict how long the higher cost of living environment will last.”
What’s the link between inflation and interest rates?
Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.
The Bank of England is particularly focused on inflation, as it has a remit to ensure prices do not spiral out of control.
This is largely done through influencing interest rates, which are typically raised to fight inflation.
The trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.
What does the inflation outlook mean for future interest rate cuts?
The Bank of England chose to hold interest rates at 3.75% at the most recent MPC meeting on 19 March.
The vote to hold was unanimous as members of the MPC agreed they would do everything in their power to protect the UK from increased inflation.
Before the most recent conflict in the Middle East, analysts expected the MPC to cut interest rates twice in 2026, with a 90% chance of a cut at the next MPC meeting on 19 March having been priced in by the markets.
However, the chances of this dropped dramatically as the inflationary risk of the US-Iran war became clearer. Most economists no longer expect any more rate cuts in 2026, with the market even pricing in rate hikes.
Deutsche Bank does not think the Bank will cut rates at all in 2026, keeping the base rate at 3.75%.
Raja said: “The bump back in inflation will put to rest any talk of rate cuts this year. And the risks that the Bank of England reverses course and hikes Bank Rate can no longer be dismissed.”
Meanwhile, Oxford Economics is more pessimistic, expecting the MPC to keep interest rates where they are until well into 2027, with a cut potentially only on the cards by the end of next year.
