The UK’s inflation rate held at 3% in the year to February, according to data from the Office for National Statistics, with falling fuel prices offset by rising clothing costs. However, the picture has shifted notably since those figures were collected, raising concerns about where inflation is heading next.
Fuel prices shift the inflation outlook
The February data captured a moment when petrol prices were at their lowest level since June 2021. At that point, the average cost of petrol stood at 131.6p per litre, while diesel averaged 141.1p. Since then, global events have driven a sharp increase in wholesale oil prices, pushing fuel costs at the pump significantly higher. More recent figures show petrol climbing to around 149.4p per litre, with diesel rising even more steeply.
This change matters because fuel costs feed into almost every part of the economy. As transport and production costs rise, businesses typically pass those costs on to consumers. That creates upward pressure not only on energy bills, but also on food, leisure, and everyday goods. As a result, earlier expectations that inflation would continue to fall through 2026 are now looking increasingly uncertain.
While inflation has dropped considerably from its peak of 11.1% in October 2022, it is important to be clear about what that means in practice. Prices are still rising – just at a slower pace. For households, the cost of living continues to increase, even if the rate of that increase has eased.
Prices still rising despite slower inflation
Within the February data, clothing and footwear were a key driver of inflation. Prices in this category rose by 0.9% over the year, compared with no increase in the previous month’s figures. At the same time, some downward pressure came from discounted alcohol, which helped moderate the overall inflation rate. Alcohol and tobacco recorded their lowest annual inflation since February 2022.
Looking ahead, the trajectory of inflation is now closely tied to global energy markets. Analysts are increasingly cautious. Some forecasts suggest inflation could rise again, potentially reaching around 4.6% by the end of the year if energy prices remain elevated.
This shift has implications for interest rates. The Bank of England uses interest rates as its primary tool to manage inflation, aiming to keep it close to a 2% target. When inflation is above that level, rates are typically held higher, or even increased, to reduce spending and ease demand across the economy.
Interest rates and the road ahead
Earlier in the year, there had been growing expectations that interest rates might begin to fall in 2026. Those expectations are now fading. Some economists are even suggesting that further rate rises could be back on the table if inflation accelerates again.
At the same time, wage growth has started to slow, with recent data showing the weakest increases in more than five years. Although pay has still been rising faster than prices, that balance could shift if inflation picks up again. If it does, households may once again feel their spending power squeezed.
The Government has indicated it is taking steps to manage the cost of living and support long-term economic stability. Measures aimed at reducing food prices, improving energy security, and tackling unfair pricing practices are part of that approach. However, external pressures, particularly those affecting global energy markets, remain largely outside domestic control.
There are also signs of concern around pricing behaviour in certain sectors. The UK’s competition watchdog has begun investigating reports of potential profiteering among heating oil suppliers. Industry representatives have responded by arguing that providers are largely driven by wholesale market conditions rather than setting prices independently.
Overall, while inflation appeared stable at the start of the year, the underlying conditions are becoming more volatile. The direction of travel will depend heavily on energy costs and how quickly those pressures filter through the wider economy.
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