- CPI 3.3% in March vs 3.0% in February
- Reuters poll median March forecast was 3.3%
- Data shows first impact on CPI from Iran war
- Services price inflation rises, core measure falls
- Motor fuels show biggest monthly rise since 2022
LONDON, April 22 (Reuters) - British inflation rose to 3.3% in March from 3.0% in February, according to data showing the first impact on prices from the Iran war which the Bank of England fears could lead to a return of the country's persistently high inflation problem.
The prices paid by factories for their inputs jumped by much more than expected, the figures from the Office for National Statistics also showed on Wednesday.
Economists said the increases - driven largely by fuel - were unlikely to push the BoE's Monetary Policy Committee into raising interest rates at next week's meeting.
The key question was whether the leap in energy prices would ignite broader inflation or whether the weak jobs market would keep a lid on demands for higher pay and price increases by companies.
"For the Bank of England, the spectre of stagflation will stalk MPC members as they sit around the table next week," Danni Hewson, head of financial analysis at fund management firm AJ Bell, said.
"If they don't hike rates and inflation becomes embedded they will be accused of not acting soon enough, but if the UK does more than flirt with recession in the second half of the year they will face criticism for not doing enough to stimulate an economy struggling to remain steady," Hewson said.
The price of motor fuels shot up by 8.7% on the month, the biggest rise since June 2022, shortly after Russia's full-scale invasion of Ukraine, the ONS said.
The data showed services price inflation - which the BoE watches closely as a sign of longer-term inflation pressures - rose unexpectedly to 4.5% from 4.3% in February.
But much of that increase was due to a rise in air fares driven by the timing of the Easter holidays.
Core inflation, excluding volatile food, energy, alcohol and tobacco prices, weakened to 3.1% from 3.2% in February.
Ruth Gregory, deputy chief UK economist at Capital Economics, said headline inflation would probably fall to 2.9% in April as last year's big increases in utility bills dropped out of the comparison.
"But the next eight months will be an uncomfortable ride for the MPC," she said.
The rise in Britain's inflation rate in March was less severe than a jump in the euro zone to 2.6% from 1.9% in February, due mostly to the way that UK household energy bills are set on a quarterly basis and are due to rise only in July.
WAR IMPACT
Before the U.S.-Israeli war on Iran began on February 28, the BoE said British inflation - the highest among the Group of Seven economies for much of the last four years - was likely to be close to its 2% target in April.
But last month it sharply increased its inflation forecast due to the energy price shock, predicting it would rise towards 3.5% by the middle of 2026. The International Monetary Fund last week said British inflation would peak at 4%.
The British central bank is expected to keep borrowing costs on hold on April 30 after an MPC meeting.
Governor Andrew Bailey said last week that the BoE should not be in a rush to move on rates, given the uncertainty about the extent to which the rise in headline inflation will affect wages and price-setting by companies.
But BoE Chief Economist Huw Pill said it would be a mistake to adopt a wait-and-see approach because people in Britain would probably be quick to assume a damaging bout of inflation is on the way, given the surge in price growth to above 11% in 2022.
Financial markets on Wednesday were betting on one or possibly two quarter-point interest rate rises this year. Most economists in a Reuters poll expected no change in borrowing costs during 2026.
The inflationary impact of the Iran war has dashed finance minister Rachel Reeves' hopes of finally speeding up Britain's economy in the short term, adding to the headaches facing Prime Minister Keir Starmer whose popularity has slumped.
The ONS figures showed cost inflation reported by manufacturers - some of which will filter through into consumer prices - soared last month.
Producer input price inflation leapt in March alone by 4.4%, the second-biggest monthly increase since records began in 1984.
Writing by William Schomberg; Editing by Andrew Cawthorne and Toby Chopra
Source: Reuters