Inflation is back to ticking up. Here is the context that matters.

In light of the recent inflation update, with March's CPI coming in at 3.3 per cent, it is probably prescient to look at the context this data is lying in — and where we think the world is heading on inflation from here. CPI inflation in the UK for the twelve months to March stands at 3.3 per cent. This is up from 3.0 per cent in both February and January, and the jump is not trivial. Something has shifted.

Presumably, inflation has ticked up primarily because of a spike in global energy prices tied to the Middle Eastern conflict with Iran. That is exactly what the component data shows. The rise has fed quickly into motor fuel and domestic heating oil prices. The indirect effects — the pass-through into business costs and then into the wider basket of goods and services consumers buy — probably haven't come through to the market yet. They may take a little while to be seen properly.

That lag is important. It means the March number is likely not the peak, and the June, July and August prints are almost certainly going to be worse before they get better.

If we look over the last couple of years, we have seen quite an extraordinary period of time for inflation. UK CPI peaked at 11.1 per cent in October 2022. That was a forty-one year high — you have to go back to the early 1980s to find a comparable print. It was driven by a combination of post-pandemic demand, broken supply chains related to the pandemic, Russia's invasion of Ukraine, and a reasonably tight UK labour market.

After that peak, disinflation proceeded more quickly than many had feared — including the IMF at the time. UK inflation returned to the 2 per cent target by mid-2024. But from there it drifted back up into the 3 to 4 per cent range through 2025, only briefly dipping to 3 per cent in January and February of this year.

That drift was partially driven by higher wages filtering through into services prices, government taxation in the form of the employer National Insurance Contribution increases announced in the October 2024 Budget, and other administered cost increases such as council tax and regulated water bills. The point worth making here is that while the acute phase of the inflation crisis ended, the return to sustainable 2 per cent inflation never properly arrived.

The four phases, briefly

The period 2005 to 2008 was the late Great Moderation. CPI mostly sat between 2 and 2.3 per cent, anchored by credible inflation targeting, globalised goods prices, and — crucially — stable energy markets. That ended abruptly with the 2008 oil spike to $147 per barrel, which pushed CPI to 5.2 per cent before the financial crisis collapsed demand.

2009 to 2014 was the messy post-crisis decade: a roughly 25 per cent sterling depreciation, the VAT increase from 17.5 to 20 per cent in January 2011, and a 2011 global commodity spike all combined to push CPI to 5.2 per cent again. Then austerity, weak demand, and cheap oil brought inflation down to effectively zero by 2015.

The 2016 to 2020 phase was defined by Brexit and the pandemic. Research from the Centre for Economic Performance (Breinlich, Leromain, Novy and Sampson, published in the International Economic Review in 2022) found that the Brexit-induced sterling depreciation raised UK consumer prices by roughly 2.9 per cent, costing the average household around £870 a year. The effect was concentrated in import-heavy categories. It is a reminder that in an open economy like the UK, currency moves matter.

Then 2021 to 2023 — the headline event. Ukraine, gas, supply chains, a tight labour market, and a generous fiscal response all compounded. Core inflation peaked at 7.1 per cent in May 2023. Services inflation hit 7.4 per cent, the highest since 1992. The Bank of England's own Forecast Evaluation Report, published in January of this year, reckons that energy alone can account for roughly half of the peak forecast miss, with other global factors explaining most of the remainder.

So what does the March data actually tell us? A few things. Transport was the biggest upward contributor to the jump. Transport inflation rose 4.7 per cent in March 2026 — the highest reading since December 2022 — and that was driven almost entirely by increases in motor fuel costs. Petrol rose 8.6 pence per litre month-on-month; diesel rose 17.6 pence per litre. That is a dramatic rise in a single month and a direct read-through from what has been happening to oil markets since February.

Energy in the home has been no better. Domestic heating oil prices rose 95.3 per cent year on year in March — the largest increase since September 2022. Housing and household services inflation reached 4.3 per cent. Elsewhere the numbers were less dramatic, but the direction is uncomfortable. Food and non-alcoholic beverages rose 3.7 per cent in March, up from 3.3 per cent in February. Food inflation had been grinding gradually lower in late 2024 and early 2025 before this renewed pick-up. If the disruption in the Straits of Hormuz persists as a long-run issue, it is likely to indirectly increase food costs further in the longer term.

Then there is services inflation. This is the one the Bank of England genuinely worries about. Services inflation rose to 4.5 per cent in March, up from 4.3 per cent in February. Services inflation is of particular importance because it has been the single most persistent element of the post-pandemic inflation story, and it remains well above a level consistent with the 2 per cent target. So far we are not really seeing it abate in any way.

As inflation throughout the general economy keeps going, there has been a tendency for it to feed into higher and higher services inflation — which is essentially wages. This probably underlies the situation: reasonably high levels of employment in total, and some robustness within the economy such that wage inflation is pushing through as general price inflation occurs. For reference, ONS regular pay growth was 3.6 per cent in the three months to February 2026, down from 4.5 per cent in November 2025 — easing, but not yet consistent with target-compatible services inflation.

Components breakdown / March 2026

The Bank of England has already cut Bank Rate from a peak of 5.25 per cent down to the current 3.75 per cent, and it has now held there for the last three consecutive meetings. In the March minutes, the Committee signalled explicitly that the new energy shock from the conflict with Iran has shifted the balance of likely policy away from further cuts and toward a longer hold at approximately 3.75 per cent.

The Bank estimates that CPI inflation will run between 3.0 per cent and 3.5 per cent through Q2 and Q3 of 2026 before resuming its decline. That is preliminary and explicitly conditional — conditional on the Iranian situation resolving itself in some reasonable timeframe, and arguably also on US international policy and the Trump administration's inclination, if it has one, to calm the situation down.

That last point is worth dwelling on. As America moves toward the midterms, and given Trump's proclivity toward escalation across the globe — either through tariffs or more aggressive actions against other countries — I would not write off the possibility of him becoming more volatile as the months go by. He has a tendency to not like world trade to be calm. Even if the Iranian situation were to be fully resolved (and at this immediate point we are not really seeing how that happens), there are other supply-side shocks the administration could trigger.

So what are we expecting in the near term? It is genuinely difficult to say with confidence, because there are so many variables that we do not really know. When does the Iranian crisis end? Will the Trump administration come up with new measures that cause upward pressure on inflation in the coming months? We do not have any information yet, or even much inclination of what could happen — but we do know that so far Trump has generally been keen on actions that have caused upward pressure on inflation rather than the reverse.

My personal view — and this is a personal view — is that I expect UK inflation to bounce slightly higher than the Bank of England's expectations. I think we are plausibly looking at 3.5 to 4.5 per cent, likely with a summer peak. That assumes the Iranian situation does de-escalate somewhat. But looking at energy futures, I suspect we see a peak in inflation during the summer months and then a slight decrease.

Over a slightly longer horizon, I am not really sure how likely we are to see much reduction in inflation even from those higher levels. I am still looking at expectations of UK inflation knocking around 3.5 per cent over the coming twelve months — and even slightly further into the future as well.

Why the longer-term view stays elevated

The reason I do not expect much reduction even on a longer horizon is that I don't think, politically, the country is looking at lower taxation. If anything, I expect slight incremental amounts — not dramatic, but incremental increases in taxation on businesses and, to a lesser extent, family households. That is going to be driven by fiscal necessity. The budget was already pretty tight in the first place, and the Government still needs to get its money from somewhere. There appears to be an inclination right now, from really most parties, not to pursue any form of significant tax cuts. So I expect tax rises, or at least non-abatement of taxes, in the coming years.

These are the sorts of measures that feed directly into prices. Employer NICs get passed through to consumers. Council tax rises hit household budgets. Regulated water bills — already sharply higher from April 2025 — go into CPI mechanically. None of these individually move the headline by much. Collectively, they put a floor under it.

I also think, generally speaking, the world economy has been surprisingly robust throughout the last twelve months, and that underlies some of the basic demand-side pressure that keeps inflation elevated. The UK is unlikely to change its immigration policy in a direction that would exert significant downward pressure on wages either. Between the fiscal picture at home, sticky services inflation, and a world economy that keeps refusing to roll over, the disinflationary forces are just not very strong.

How this compares with the institutions

It is worth noting where my view sits relative to the official forecasts. The Office for Budget Responsibility, in its March 2026 Economic and Fiscal Outlook, forecast CPI averaging 2.3 per cent in 2026 and reaching the 2 per cent target in late 2026. The OBR itself acknowledged that forecast was finalised before the Middle East escalation, and it will almost certainly be revised upward in the Autumn Budget forecast.

The Bank of England's February 2026 Monetary Policy Report had CPI falling back to 2.1 per cent in Q2. The March minutes updated that to 3.0 to 3.5 per cent in Q2 and Q3. My view — 3.5 to 4.5 per cent summer peak — sits slightly above the Bank's current best estimate, and is closer to what the OECD recently flagged when it said the UK faces the second-highest headline inflation exposure in the G7 to the Middle East energy shock (behind only the United States).

It is worth separating what is driving this episode cyclically from what is driving it structurally, because the two have different implications for how long it lasts.

The cyclical drivers are the obvious ones. Global commodity cycles, particularly oil and gas — the current Iran situation is textbook. Exchange-rate swings driven by relative interest rates and risk appetite. Fiscal stance — tax changes, benefits uprating, public sector pay. The output gap — how much slack sits in the economy. Specific shocks like shipping disruptions in the Red Sea or Hormuz. These cycle in and out over months and quarters.

The structural drivers matter more for the longer horizon and are what underpin my view that 3.5 per cent is the sensible central case rather than 2 per cent.

The UK imports a high share of its food, energy, and manufactured goods, and it has a relatively volatile currency. Research from the Centre for Economic Performance puts aggregate exchange-rate pass-through at roughly 0.29 — meaning every 10 per cent sterling depreciation lifts the overall price level by about 2.9 per cent over time. Despite North Sea production, the UK is a net importer of natural gas and heavily exposed to European wholesale gas prices, which are inherently geopolitical.

About 80 per cent of UK GDP is services, which makes domestic wage dynamics the single most important inflation driver, not goods prices. Chronic housing undersupply keeps shelter costs rising faster than the rest of the basket, structurally elevating CPIH. Administered and regulated prices — water, rail fares, tuition fees, licence fees — are reset through mechanisms that often use backward-looking inflation measures, which builds persistence into the system. Demographics and labour supply have tightened the labour market structurally, with long-term sickness and earlier retirement keeping participation below pre-pandemic levels.

None of these structural factors are going to be resolved in the next 12 to 24 months. Some of them — housing supply, immigration policy — have moved in the wrong direction over the past decade. Which is why I suspect the 2 per cent target, while still the Bank's aim, may remain more of an aspiration than a destination for a while yet.

There are a handful of variables that, if they move meaningfully in either direction, would force a rethink of the above. These are what I will be tracking over the next few months.

First, the duration of the energy shock. A quick de-escalation that brings oil back below $80 would pull the summer CPI peak down substantially. A prolonged disruption to shipping through Hormuz would push it up. Second, pay settlements for 2026. The Bank's Agents now put private-sector settlements at around 3.6 per cent for this year, up from 3.4 per cent before the energy shock. If that drifts to 4 per cent or higher, services inflation does not come down.

Third, the Autumn Budget. Any further increases in employer NICs, regulated prices, or indirect taxes will mechanically add to CPI. Fourth, sterling. If the Fed cuts faster than the MPC, sterling could strengthen and ease imported inflation. If UK growth disappoints and gilts sell off, the reverse. Fifth, inflation expectations. Citi and Bank/Ipsos surveys showed year-ahead expectations falling again ahead of the March MPC meeting, but market-based inflation compensation has risen. That tension is genuinely the central problem the Committee is trying to solve right now.

The 30 April MPC meeting, followed by the May Monetary Policy Report, should give us a much sharper view. For now, though, the March print is a reminder that the disinflation story has not played out as cleanly as many hoped — and there are more reasons to suspect the next twelve months look more like 3.5 per cent than 2 per cent.