UK Inflation Data Eases Concerns Over Iran War Impact

The Impact of Iran War on UK Inflation

When Iran choked off oil supplies through the Strait of Hormuz at the start of March, there were dire warnings about rocketing UK inflation and drastic action the Bank of England might take to rein it in. Investors were expecting as many as three quarter-point rises in interest rates before the end of the year – a sharp turnaround from earlier forecasts of rate cuts.

UK Inflation Data

However, since then, a series of economic readings have come in better than forecast. Wednesday's news that inflation was steady at 2.8% last month is the latest evidence raising hopes that the real-world impact of the Middle East war on the cost of living could be more muted than first feared. The cost of motor fuels in May was up an eyewatering 25% on a year ago, but food prices were actually down 0.1% month on month.

The Data Analysis

Economists responded to the weaker-than-expected reading by downgrading their UK inflation forecasts for the coming months – and casting doubt on the prospect of future rate rises. The Bank of England's governor, Andrew Bailey, has remarked that firms lack 'pricing power' to drive up inflation; in that they don't think cash-strapped shoppers would tolerate higher prices.

The Impact Analysis

The hoped-for reopening of the Strait of Hormuz after this week's announcement of a US-Iran peace deal has already shifted oil prices to below $80 a barrel, eliminating the Bank's worst-case scenario. That means it may not be too long before the MPC starts to fret more about the downturn in the jobs market, than rising prices. The next move may yet be a cut.

The Prediction

In the face of above-target inflation, most analysts still expect at least one interest rate rise this year, though markets are now betting that is more likely to happen in November than September.