INFLATION in the UK is expected to rise tomorrow as experts fear “it will likely surpass 4%” as the effects of the Iran war is fully baked into the economy.
The Consumer Prices Index (CPI) is set to be released at 7am on Wednesday May 20th and it’s widely expected to go up.
It is currently at 3.3%, up from 3% the previous month – motor fuels made the largest upward contribution to the monthly change as the price of oil rose globally.
Tension in the Middle East remains high with Iran still in control of the Strait of Hormuz, through which around 20% of the world’s oil and liquefied natural gas travels.
US President Donald Trump said he held off striking Iran today as “serious negotiations are now taking place”, but it is not clear if the war is going to end any time soon.
Inflation will likely surpass 4%
Antonia Medlicott, Founder & MD at London-based Investing Insiders, said she expects the figure to surpass 4%.
She added: “April’s inflation figures will inevitably increase due to the Iran war. As much of the impact of the US-Iranian conflict hadn’t hit the high street in the data released in March, we can expect the war to continue to influence April’s figures, and this means it will likely surpass 4%.
“Services inflation hit 4.5% in the previous data, which was above forecasts, so this upward inflation trend will continue as fuel rises and the effects of the blockade of the Strait of Hormuz is fully felt across the country.
“We won’t be reaching the Bank of England’s inflation target of 2% anytime soon as the conflict drags on, and at a time when the cost of living squeezes everything out of ordinary people, there is no light at the end of the tunnel as inflation of food and energy far exceeds the headline figure. Anyone with variable-rate debt should take note, as people with mortgages or loans will feel the strain from impending rises.”
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said summer cuts for the Bank of England base rate are now “off the table”.
He added: “Tomorrow’s CPI print looks set to creep up to 3.5% to 3.7%. A push to 4% is unlikely imminently, but looms if April’s month-on-month rise matches March’s 0.7%, compounded by base effects. The Iran conflict is already baked in.
“March’s jump was driven by fuel and heating oil spikes, and April will reflect those embedded energy and logistics costs working through supply chains. Two forces amplify this: sticky services inflation, fuelled by April’s index-linked contract renewals, and rapid freight surcharge pass-through.
“Together, they create a supply-side squeeze that compresses small business’ margins as rising operational costs meet fragile consumer confidence. For the Bank of England, a hot print reinforces a higher-for-longer stance on the 3.75% Bank Rate, effectively taking summer cuts off the table and shifting the narrative from a temporary energy blip to entrenched second-round effects.”
Summer Bank of England base rate cuts are off the table
Harry Goodliffe, Director at Winchester-based HTG Mortgages, said prices in the UK are being affected by worries about the Iran war.
He added: “4% inflation isn’t impossible. I’d be surprised if tomorrow’s figure doesn’t tick up again. It feels like fuel, everyday shopping, and general nerves around Iran and the UK government turmoil are continuing to affect prices.
“I don’t think we hit 4% just yet, but somewhere closer to 3.5% or 3.6% wouldn’t shock me at all.”
Sarah Fox-Clinch, Director at mortgage broker Fox Davidson, said mortgage rates may tick up again after inflation figures tomorrow.
She added: “Inflation will almost certainly be going up. April is the month when every annual price reset lands at once: the Ofgem cap, council tax, water bills, broadband and mobile contracts. Add in the petrol rises now showing on forecourts since the Iran conflict escalated, and a reading in the 3.5% to 3.7% range looks the most likely outcome.
“The Bank of England has already flagged CPI sitting between 3% and 3.5% across the second and third quarters, which tells you which way they expect this to move. The bigger story for anyone with a mortgage is what this does to the Bank of England’s rate path.
“We had been looking at further base rate cuts through the summer, and that is now off the table until inflation stabilises. Swap rates have already moved, which means fixed mortgage rates have started to creep back up after a steady period of falls. What we are seeing with clients now is a clear shift back towards five-year fixes.”
Photo by Joachim Schnürle on Unsplash.
