The Iran war has added another item to what is already a long list of price pressures bearing down on UK households, as the Bank of England voted unanimously to hold rates at 3.75% on Thursday and warned that rising global energy costs could push inflation above 3% and require rate hikes. The monetary policy committee described the conflict as a significant new shock that has disrupted the UK’s path toward its 2% inflation target. For a British public that has endured five years of above-target inflation across multiple successive shocks, the announcement offered little comfort.
The list of price pressures that UK consumers have faced over recent years is long and varied. The pandemic triggered supply chain disruptions that pushed goods prices higher. The 2022 energy crisis sent household bills soaring. Elevated service sector inflation has persisted for longer than expected. Now the Iran war threatens to add an energy price chapter to a story that many had hoped was drawing to a close.
Governor Andrew Bailey acknowledged the cumulative weight of successive shocks on UK households. He said the Bank was committed to returning inflation to its 2% target regardless of how long it took or what obstacles were placed in the way. He warned that rising petrol prices were the earliest evidence of the new shock and said household energy bills could follow if supply disruption persists.
Financial markets responded by pricing in rate hikes in June and later in the year. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders adjusted their expectations. Analysts noted that the Bank’s credibility on inflation was being tested by the repeated succession of above-target episodes and would depend on how decisively it responded to the latest shock.
The political consequence of adding to the long list of price pressures is significant. Governments are judged on the economic outcomes that citizens experience, and a further period of elevated inflation after successive shocks weakens the case that the underlying economic management is sound. The Bank and the government both face the challenge of explaining why the latest shock was unavoidable and what they are doing to mitigate its consequences.