UK Inflation Holds at 3% Ahead of Middle East War, With Markets Eyeing Oil Surge

TradingKey - UK inflation remained steady at 3% in February, hovering at its lowest level in 11 months before the outbreak of conflict in the Middle East heightened concerns about energy costs.

Data released Wednesday by the Office for National Statistics showed the consumer price index (CPI) rising 3% from a year earlier, matching economists’ expectations and staying above the Bank of England’s 2% medium-term target.

Service-sector inflation eased slightly to 4.3%, the lowest since March 2022, while core CPI ticked up to 3.2% from 3.1%, indicating persistent underlying price pressures. Grant Fitzner, chief economist at the ONS, said rising clothing prices contributed the most to the overall increase, partly offset by lower gasoline prices. However, he noted that fuel data were collected before the recent escalation in the Middle East and the subsequent surge in crude.

Source: TradingEconomics

Market focus has since shifted to the sharp rise in oil prices triggered by the Iran conflict. The renewed geopolitical risk has upended the inflation outlook and prompted traders to bet the BOE may eventually tighten policy to head off a new price spiral.

Sterling advanced 0.3% against the dollar, while 10-year gilt yields down to around 4.8%. Traders are now pricing a 75% probability that the Monetary Policy Committee will hold its benchmark rate at 3.75% in May. If Brent crude remains above $90 a barrel, markets see a 35% chance of a 25-basis-point rate hike later this year.