UK CPI rose to 3.3 per cent in March (chart 1, source ONS and Eurostat), from three per cent in February. Unsurprisingly the main contributors to the rise were transport costs, principally motor fuels. Weekly data from the Department for Energy shows that the price of a litre of unleaded is up around 20 per cent since the conflict began. There was also a large month-on-month increase in air fares.

While headline CPI rose, core inflation (exc. food and energy) fell slightly in the UK to 3.1 per cent (from 3.2 per cent). Persistent rises in energy costs will, however, filter through to the wider inflation basket as firms pass on energy and transport costs. Incoming surveys continue to point to firm expectations of price rises in response to the energy shock. April’s Decision Maker Panel Survey, for example, reported that 64 per cent of firms expect higher prices in the coming year in response to the surge in energy costs as a result of the Iran conflict. We also see similar strength in pricing intentions in April’s flash PMIs.

Eurostat data point to a similar profile across most eurozone economies. Across the bloc HCPI picked up to 2.6 per cent in March from 1.9 per cent, with surging energy costs the main driver. And preliminary estimates show eurozone inflation at three per cent in April. Annual energy price inflation hit an estimated 10.9 per cent in April from -3.1 per cent in February.

Looking to the coming quarters, the Bank of England’s April Monetary Policy Report (MPR) presents a range of scenarios for the severity and duration of the Middle East conflict for its inflation forecast. These range from oil peaking at $108 pb and falling back below $80 by 2027 Q1 to oil prices peaking at $130 and remaining high for the next year. In the high price scenario CPI in 2026 Q2 rises to 3.6 per cent and peaks over 6 per cent in early 2027. In the latter scenario above-target inflation is more persistent as we once again see stronger second-round effects from higher wage growth.

Everybody freeze…for now

In response to the risks to inflation and growth the main Central Banks kept interest rates on hold in April. There was broadly consistent messaging across the Fed, ECB and Bank of England – inflation is elevated, there is a great deal of uncertainty about how long the conflict will last, but monetary policy makers are assessing all incoming data – particularly labour market developments and inflation expectations – and stand ready to act as appropriate.

At the ECB press conference there was a fairly downbeat assessment of potential risks to growth. A prolonged conflict could see current disruptions spiral, hitting business investment and household spending and further exacerbating supply chain disruptions for firms. The statement also noted that ECB Council would not commit to a particular path for interest rates.

The Bank of England’s MPC minutes also focused on the impact of the Middle East conflict, noting that the UK economy enters this period of heightened tensions in a different place compared with the invasion of Ukraine. Weaker demand and a softer labour market should limit second-round effects from high energy prices, assuming there is a fairly swift end to the conflict. 

MPC members view the mostly likely scenario as a sustained period of high oil prices (around $108bp) falling to around $80 at the end of the forecast horizon in 2029, with modest pass through in terms of longer-term inflation expectations and wage growth. This assessment, therefore supported Bank Rate remaining at its current level of 3.75 per cent. 

One member voted for a 25-basis point increase in April. In their view whether the conflict is short-lived or more protracted the risks to more persistent inflation from stronger second round effects are skewed to the upside. Therefore, a modest increase now could mitigate the risks of inflation persistence.

While it was just one vote for a rise in April, all members indicated that in the more adverse scenario of a bigger disruption for longer, monetary policy would need to tighten in response. We’re now more than two months into the conflict, whether we are any clearer about an end to the conflict when the MPC meets again in six weeks is anyone’s guess.

No let up in oil price rise

Oil prices had a particularly volatile end to April (chart 2, source Trading Economics) as markets digest somewhat mixed messaging on the progress of talks to end the conflict. At one point Brent pushed past $125 pb, the highest since the start of the Ukrainian conflict in 2022.

Neither side looks like giving ground and with the Strait of Hormuz still effectively blocked and renewed attacks on facilities in the UAE pressure on global oil supply continues. New estimates from Goldman Sachs point to global oil stocks approaching their lowest levels for eight years.

Analysts continue to predict months of disruption in oil markets and supply chains even if there is a swift conclusion to talks between the US and Iran, which is looking increasingly unlikely.

The data on vacancies in Q1 is, perhaps, an early confirmation of surveys indicating a reduced appetite to recruit amongst firms. In the three months to March vacancies were down nearly four per cent compared with the previous quarter, after remaining broadly stable in the second half of 2025 (chart 3, source ONS).

The bulk of the fall in vacancies was across small firms (vacancies in firms with fewer than 10 employees fell 16% and for those employing 10-49 vacancies dropped by 6%). The number of unemployed per vacancy has, however, been stable at 2.5 since mid-2025.

First estimates point to modest growth in both the US and eurozone in the first three months of the year (chart 4, source Eurostat and BEA). In the US there was something of a rebound following the government shutdown at the end of last year, but growth of two per cent, annualised, was softer than economists were expecting. 

Activity was boosted by a recovery in government spending and a strong quarter for private sector investment, with spending on AI technologies a key driver. Consumer spending, however slowed from the previous quarter signalling the early effects of fragile confidence and concerns about rising prices.