UK inflation forecast: where are prices heading next?
The UK inflation rate rose by 3.3% in March as the fallout from the Middle East conflict hit the economy – what’s next for prices?
Sam Walker
Expectations of inflation slowing to 2% this year have largely been scuppered due to conflict in the Middle East.
The latest inflation data from the Office for National Statistics (ONS) shows prices, as measured by the Consumer Price Index (CPI), rose by 3.3% in the year to March 2026, up from 3% in the year to February 2026.
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Where exactly could inflation go, what will the impact of the tensions in the Middle East be and what does it all mean for interest rates? Here’s everything you need to know.
Where has inflation gone recently?
The CPI measure of inflation was 3% in January 2025, before peaking at 3.8% in July and slowing back to 3% in the first two months of 2026.
January and February’s data seemed to support the case economists were making that inflation would fall through 2026 and reach the Bank of England’s 2% target (which is set by the government) this year.
However, as the economic impact of the Iran war has become clearer, experts have changed their predictions.
Where could inflation go next?
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’s latest forecasts suggest the Ofgem price cap will rise by 12% (£195) to £1,836 per year from July. To put that in context, its prediction for the July price cap before the outbreak of tensions in Iran was £1,645 per year, almost £200 lower.
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.
These factors have led many economists to alter their predictions for inflation for the rest of 2026.
In February, prior to the Iran conflict, the Bank of England forecast CPI would slow to 2.1% in April, largely due to measures announced in the 2025 Autumn Budget. However, by mid-March, the bank’s Monetary Policy Committee had revised this prediction up to 3%.
Alongside this prediction, the International Monetary Fund (IMF) is expecting price growth to head towards 4% in 2026.
What does an Iran ceasefire mean for UK inflation?
A ceasefire is good news for the global economy, but how that ceasefire plays out is crucial.
In terms of inflation, it’s important that the Strait of Hormuz is open and ships carrying gas, oil, fertiliser and more can pass through. Around 20% of the world’s oil goes through the waterway so any block, as there has been recently, pushes up oil prices significantly.
On 8 April, the US and Iran agreed a two-week ceasefire, with oil prices plummeting after the announcement. 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.
On 21 April, president Donald Trump, posting on the Truth Social platform, extended the ceasefire, stating the government of Iran was “seriously fractured”, but maintained a military blockade of Iran ports along the Strait of Hormuz would remain in place.
By blockading the ports, Trump is hoping to hit Iran’s oil revenue and put pressure on it to stop charging ships passing through significant tolls, however, this could lead to oil and gas prices rising and any ceasefire collapsing if tensions ratchet up.
In any case, regardless of where talks go from here, the damage could already be done.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW), said positive talks between Iran and the US had come too late.
“The extended ceasefire won’t prevent a painful period of accelerating inflation with skyrocketing energy costs and food prices likely to lift the headline rate (CPI) above 4% by the autumn, despite slower economic demand,” he said.
Susannah Streeter, chief investment strategist at wealth manager WealthClub, added: “The ceasefire extension hasn’t done much to calm nerves given that worries remain about the impact of the energy squeeze on the global economy.
“Shipments from the Middle East are in limbo and a resolution to the conflict remains elusive.”
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%.
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.
