Britain in the foothills of a fresh inflation shock – with bigger rises in food and energy bills still to come

CPI inflation jumped to 3.3 per cent in March, up from 3.0 per cent in February – in line with market expectations – in the first sign of war-driven price rises feeding through to British households, the Resolution Foundation said today (Wednesday).

The rise in March was largely driven by petrol prices, which have increased sharply since the outbreak of the war. The average price of a litre of unleaded petrol increased from £1.32 in February to £1.40 in March, a rise of 6.5 per cent. The average price of a litre of unleaded petrol is currently £1.58 – a further rise of around 12 per cent compared with the March average meaning higher petrol prices will provide further upward impetus to inflation next month.

While this will be felt immediately in the pockets of motorists, these increases represent only the beginning of the likely inflationary impact of the conflict.

The two biggest items in most household budgets – food and energy – are yet to feel the full effect of a global surge in energy costs. Food prices typically take around 12 months to adjust to shifts in global commodity costs, while domestic energy bills will only move once Ofgem resets the price cap in July, and again in October.

Alongside this inflation release, the Foundation has released new analysis of the policy response urging the Government prepare tightly targeted and time-limited energy discounts for vulnerable low-income households.

The analysis also suggest that the weak state of the labour market should give the Bank of England room to be patient in raising interest and that the Chancellor should stay within her fiscal rules when designing the government’s response to the rise in the cost of living.

James Smith, Chief Economist at the Resolution Foundation, said:

“Today’s inflation figures show the first impact of the war on British household budgets – but further rises in food and energy bills are still to come.

“The timing matters: petrol tracks global prices very promptly, but food price rises can take a year to fully feed through, and energy bills will not rise decisively until the colder months. That means inflation is likely to remain elevated through the rest of the year, albeit at much lower rates than seen after Russia’s invasion of Ukraine.

“The outlook remains highly uncertain, and there is a lot the Government can do to support the most vulnerable households. They should move quickly to prepare targeted and temporary support on energy bills, while a weaker labour market may offer the Bank of England leeway to avoid the major rate hikes that followed the last price shock.”