UK inflation hits 3.5%, highest in a year, as Iran war pushes up fuel costs

Why This Matters

• Households face a fresh squeeze on living costs as inflation moves further above the Bank of England's 2% target.
• A November rate rise to 4% would raise borrowing costs on mortgages and loans, adding pressure on consumers and businesses.
• The inflation spike is tangled with the Iran war and Strait of Hormuz disruption, tying U.K. domestic policy to global energy markets.

Background

The U.K. had been easing monetary policy from a 15-year high of 5.25% as inflation cooled, until the U.S. and Israeli attack on Iran in late February disrupted energy supplies. The resulting surge in fuel prices has reversed that trend, pushing inflation up for several consecutive months and prompting the Bank of England to signal that further tightening is on the way.

Key Perspectives

The Treasury: John Healey has promised budget measures next week aimed at giving families and businesses "some breathing space" against rising prices. The Bank of England: Rate-setters held the main rate at 3.75% last month but signalled readiness to hike, and most economists now expect a move to 4%. Economists and businesses: Analysts such as ICAEW's Suren Thiru see November as the likely moment for a rise; higher borrowing costs weigh on firms at a time of elevated input prices.

What to Watch

• The Treasury's budget statement next week for measures intended to offset the cost-of-living squeeze.
• The Bank of England's decision on Nov. 5, particularly whether it moves to 4% or holds again.
• The path of oil and gas prices in the Strait of Hormuz, which will determine how much further fuel-driven inflation spreads.