The United Kingdom's inflation rate remained unchanged at 3% in February, according to the Office for National Statistics (ONS), matching economists' expectations and marking the last inflation reading before the onset of the Iran war [3]. Core inflation, which excludes energy, food, alcohol, and tobacco, edged up to 3.2% from 3.1% in January [3]. ONS chief economist Grant Fitzner noted that rising clothing prices were the largest upward driver, offset by falling petrol costs, with data collected before the Middle East conflict and subsequent crude oil price increases [3].
The inflation data release coincided with heightened geopolitical tensions, as the U.S. and Israel launched airstrikes on Iran in late February, prompting retaliatory strikes and leading to an almost total block on the Strait of Hormuz, a critical passage for global oil and gas exports [3]. This blockade has caused global energy prices to surge, with the U.K. particularly vulnerable due to its reliance on imports and limited gas storage [3]. The British pound fell 0.17% against the U.S. dollar to $1.3385 following the inflation report [3].
The Bank of England (BOE) had previously been expected to cut interest rates as inflation slowed toward its 2% target, but the war and resulting energy price shock have altered this outlook. The BOE's Monetary Policy Committee voted unanimously last week to keep its benchmark rate on hold at 3.75%, warning that the conflict in the Middle East would raise household and business costs and that CPI inflation would be higher in the near term [3]. The BOE also highlighted the risk of second-round effects in wage and price-setting if elevated energy prices persist [3].
Broader market sentiment was risk-on, with S&P 500 futures rising almost 0.8% in the Asian session and European stocks set to open higher—FTSE 100 up 0.7%, DAX up 1.16%, CAC 40 up 0.9%, and FTSE MIB up 1.3%—as the U.S. signaled efforts to de-escalate the Iran conflict [2][4]. U.S. President Donald Trump stated that negotiations with Iran were ongoing, though Iranian officials denied direct talks, and reports indicated the U.S. had sent a 15-point plan to end the war [4]. Despite improved risk sentiment, the U.S. dollar traded higher, with the Dollar Index up 0.15% to near 99.35, as Iran denied involvement in ceasefire negotiations [2]. Gold prices rose while oil prices dropped following reports of potential negotiations [4].
According to [2], the impact of the U.K. inflation data on Bank of England policy expectations is expected to be limited, as the figures do not yet reflect the recent surge in energy prices driven by the Middle East conflict. However, [3] reports that the war has already rewritten inflation expectations and may delay or prevent rate cuts.
CONCLUSION
The U.K.'s steady inflation print was overshadowed by the escalation of the Iran conflict, which has driven up energy prices and complicated the Bank of England's policy outlook. Markets responded positively to signs of potential de-escalation, but the risk of persistent inflation remains elevated. The BOE is likely to maintain a cautious stance as it monitors the impact of higher energy costs on the economy.