The Iran war has taken up the pen to write the next chapter in the UK’s long and difficult inflation story, with the Bank of England voting unanimously to hold rates at 3.75% on Thursday and warning that the conflict’s energy price impact could push inflation above 3% and require rate hikes just as the previous chapter — a hard-won return toward the 2% target — was approaching its conclusion. The monetary policy committee described the war as a significant new shock that had interrupted the narrative of gradual normalisation and introduced a new and unwelcome plot development. Officials said the conflict could keep price growth elevated throughout 2026.
The UK’s inflation story over the past several years has been one of external shocks, policy responses, and gradual adjustment. The pandemic triggered the opening chapter, with supply chain disruptions driving the first significant inflation rise. The Russia-Ukraine conflict wrote the second chapter, with the energy crisis of 2022 pushing inflation to double digits and forcing the most aggressive tightening cycle in decades. The gradual disinflation of 2023 and 2024 seemed to be bringing the story toward a resolution. The Iran war has now opened a new chapter.
Governor Andrew Bailey acknowledged the continuation of the difficult story with notable candour. He said the UK economy had been dealing with a succession of external shocks that had kept inflation above target for an extended period, and that the war had added another. His commitment to the Bank’s inflation target was a pledge to write the resolution of the story, however many additional chapters it might take.
Financial markets priced in the new chapter with characteristic efficiency. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders incorporated the changed inflation narrative into their positioning. Analysts noted that the new chapter’s length and severity would depend on the war’s development, making the Middle East the most important determinant of the UK inflation story for the foreseeable future.
For UK households, each new chapter in the inflation story represents another period of financial adjustment. The new chapter written by the Iran war arrives before many households have fully recovered from the previous one, creating a compounding narrative of economic challenge. The Bank’s determination to bring the story to a resolution — with inflation sustainably at 2% — remains, but the Iran war has added pages that neither policymakers nor households wanted to read.