CPI inflation increased from 3% in February to 3.3% in March, in line with economists' expectations and largely driven by rising fuel costs amid the Iran war.
On a monthly basis, CPI rose by 0.7% in March, versus a rise of 0.3% in March 2025, as the impact of the conflict in West Asia flowed through to fuel prices.
Weekly data from the Department for Energy and Climate Change suggests that petrol prices rose by 9% between February and March.
More positively, core CPI - which excludes energy, food, alcohol and tobacco - rose by 3.1% in the 12 months to March, down from 3.2% in February.
Industry experts now say the Bank of England now faces a fine balancing act when it comes to interest rates - with most expecting a hold, compared to previous estimates of 2-3 rate hikes, as ceasefire news tempers apprehension.
Lindsay James, investment strategist at Quilter, noted: "Markets had already moved to price in a quarter point Bank of England rate hike by the end of the summer but this data could add to pressure on the MPC to act.
"A rise in rates risks misdiagnosing the problem. This inflationary pulse is being driven by supply disruption, not excess demand. Higher interest rates will do nothing to increase the flow of oil or other goods from the Middle East."
Charlie Ambler, co-chief investment officer and partner at wealth management firm Saltus, said: "The modest uptick is largely driven by rising motor fuel costs as the effects of the Iran conflict and disruption to energy flows through the Strait of Hormuz begin filtering into the data.
"That said, there are some encouraging signals beneath the surface. Core inflation, which strips out volatile food and energy prices, eased slightly to 3.1%, suggesting that underlying domestic price pressures are not accelerating.
"The Bank of England faces a genuinely difficult balancing act. Energy-driven inflation is very different in character from demand-driven inflation, and history suggests central banks are better served looking through temporary supply shocks rather than tightening into them, particularly when the labour market is softening and growth forecasts are being revised lower.
"Markets moved quickly after the last MPC meeting to price in multiple rate hikes this year, but the recent ceasefire news has tempered those expectations considerably. We think the most likely outcome remains rates on hold at the end of April, with the Bank keeping its options open as the geopolitical picture develops."
Isabel Albarran, investment officer at TrinityBridge, commented: “While the political situation has improved, even if a lasting détente is reached, global oil supply is likely to remain constrained. Shipments will have over a month of activity to catch up on, and some infrastructure has been damaged in the conflict. All in all, this could see the oil price staying higher for longer, with an inevitable impact on both prices and activity.
“For the Bank of England, this poses a two-sided problem – does the MPC vote to hike rates, quashing the risk of a lasting inflation surge before it can become embedded, or continue cutting rates, in order to cushion the economy from the effects of a negative oil supply shock? On top of this, the MPC must consider February’s stronger than expected GDP print, and growing political uncertainty arising from instability in the Labour Party.
“Today futures prices imply one rate hike over the next 12 months in the UK, which seems more reasonable than the 2-3 hikes that were priced in as recently as last week, and more in line with our expectation that the BoE will watch and wait.”
Samuel Fuller, director of Financial Markets Online, added: “Sometimes bad news doesn’t feel as bad when it was expected. That’s exactly what we’re dealing with here. A jump in headline CPI during the first month of the war had been regarded as certain - and that’s precisely what we got.
“On a monthly basis, CPI nearly doubled from 0.4% in February to 0.7% in March - and this pushed the annual reading up to 3.3%.
“So far, so on-script. What was a surprise - and will be seized on by optimistic marketwatchers - is the fall in core inflation, which strips out volatile factors like fuel and food prices.
“Modest though the fall in core CPI was, from 3.2% in February to 3.1% in March, it confirms that underlying inflation continued to head in the right direction in March despite the spike in energy prices.
“That progress is leading some to conclude that the wave of oil-related inflation heading our way could be temporary. This thinking is already being seen in UK interest rate expectations.
“The Bank of England now looks set to leave its Base Rate unchanged when its ratesetting committee meets next week, and swap rates, which reflect interest rate expectations and determine the price of fixed rate mortgages, have come down noticeably from their March peak. Several mortgage lenders are already trimming their interest rates in response and the Pound looks set to soften.
“Yet it’s premature to dismiss the UK's inflationary threat. This March data only captures the inflationary impact of the first month’s fighting, and April’s data may prove much worse.
“Even though the shooting has stopped, the global flow of oil remains severely constrained. This isn’t just threatening to ground European airliners for lack of jet fuel, it could ratchet up inflation and hammer growth in coming months.”
