British small and medium-sized enterprises are facing a fresh squeeze on margins after official figures revealed inflation jumped to 3.3% in March, the first hard evidence of how the Middle East conflict is feeding through to the real economy.
Data released by the Office for National Statistics showed the Consumer Prices Index accelerated from 3% in February, in line with City forecasts and marking the first uptick in the headline rate since December. It is also the first inflation reading to capture the surge in global oil and gas prices since hostilities erupted two months ago, with Brent crude up roughly 30% and trading around the $100-a-barrel mark for several weeks.
Petrol rose by 8.6 pence per litre to an average of 140.2p, its highest since August 2024, while diesel leapt by 17.6p to 158.7p, a level not seen since November 2023. For the nation’s 5.5 million SMEs, many of whom rely on vans, lorries and company cars to service customers, it amounts to a significant operating cost.
Air fares added further heat, climbing 10% month-on-month against a 0.3% fall over the same period a year earlier. That is the steepest February-to-March rise since 2016.
“Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years,” said Grant Fitzner, chief economist at the ONS. “Airfares were another upward driver this month, alongside rising food prices. The only significant offset came from clothing costs, where prices rose by less than this time last year.”
Economists have warned that the headline rate could climb through the summer and potentially peak above 5%, more than double the Bank of England’s 2% target. Core inflation edged down to 3.1% from 3.2%, but services inflation ticked up to 4.5% from 4.3%. Food prices were 3.7% higher year-on-year.
The Bank of England’s monetary policy committee is expected to leave Bank Rate on hold at 3.75% when it meets next Thursday.
“With inflation likely to remain above target for longer, the Bank of England is unlikely to cut rates any time soon,” said Martin Beck, chief economist at WPI Strategy. “But equally, the case for further tightening remains weak. A prolonged period of policy on hold looks the most likely outcome, leaving the economy exposed to the trajectory of the conflict and its impact on energy markets.”
Peter Dixon, senior economist at the National Institute of Economic and Social Research, said: “The Bank cannot risk appearing complacent, and we therefore expect one precautionary rate increase over the coming months.”
GDP grew by a stronger-than-expected 0.5% in February and unemployment fell to 4.9% in the three months to February, down from 5.2%, suggesting the labour market is holding up despite the external shock.
“This is not our war, but it is pushing up bills for families and businesses,” said Chancellor Rachel Reeves. “That’s why it’s my number one priority to keep costs down.”