British consumer price inflation held steady at an annual rate of 3.0% in February, matching January's reading, official figures showed. Economists surveyed had expected inflation to remain at 3.0%, a level the data note said is the lowest since March 2025.
Before the U.S.-Israeli attack on Iran at the end of February, the Bank of England had anticipated inflation falling close to its 2% target in April, when adjustments to regulated household energy bills and other price changes take effect. However, in the week following those geopolitical developments, the central bank raised its outlook sharply, now forecasting inflation to edge up toward 3.5% by the middle of the year.
A survey published on Tuesday showed a marked rise in inflation expectations among the British public, a development the Bank of England will need to factor into its decisions. At present, most household energy tariffs remain subject to a cap, but new tariff levels are scheduled to come into force in July.
Manufacturers have reported the steepest increase in costs since 1992, according to the data cited, and those higher input costs may be passed through to consumers in the near term. The combination of elevated producer costs and upcoming household energy price changes represents a potential channel for inflation to reaccelerate.
Financial markets were pricing in nearly three quarter-point interest rate hikes by the Bank of England over the course of the year. Nevertheless, a number of economists believe the central bank will keep policy rates on hold because rising energy costs could act as a drag on economic growth. Governor Andrew Bailey cautioned last week against making firm bets that the Bank of England will raise rates.
Contextual implications
- Energy price resets in July and sharply higher manufacturing input costs are primary near-term drivers that may push consumer inflation higher.
- Polling that shows elevated household inflation expectations complicates the central bank's task of returning inflation to target.
- Markets are positioned for multiple quarter-point rate increases, while some economists foresee a pause in policy tightening because of growth headwinds from higher energy costs.
While the February outturn keeps headline inflation at 3.0% for a second consecutive month, recent developments - including geopolitical events and a jump in producer costs - have led forecasters and markets to reassess the path of inflation and interest rates for the months ahead.