An increase in inflation to 3.3% has been recorded for the year to March as a result of soaring fuel prices caused by the Middle East conflict.
The data used to arrive at this figure was collected in mid-March when the war was a few weeks in. This means that the full impact is yet to be seen.
Reasons for the increase in inflation
The jump from February’s inflation rate of 3% to the latest figure of 3.3% was largely caused by increased fuel prices. Petrol and diesel prices had the largest jump in 3 years, with an increase of 4.9% in the year to March. Between February and March, the average price of petrol rose by 8.6p per litre to 140.2p. This is the highest since August 2024. The average price of diesel rose by 17.6p per litre to 158.7p, which is the highest level since November 2023.
Airfares also rose and this has been attributed to the fact that Easter was earlier this year. Food prices increased, rising from 3.3% to 3.7% in the year to March. The increases were mainly for meat, fish, confectionery, chocolate and soft drinks. Just like airfares, these increases are possibly linked to the timing of Easter.
Counteracting the increases slightly was clothing, with a drop in prices of 0.8% in the year to March.
Will interest rates go up?
The newly released inflation rate figures reflect the impact of the start of the war. However, it’s expected to take several months for the full impact to be known. Increases in the food supply chain, for example, can take about 7 to 13 months to be reflected in supermarket retail prices.
The Monetary Policy Committee (MPC) is holding its next review of the base rate on 30th April. The rate currently stands at 3.75% so the question is now whether this will be raised to help combat the increase in inflation.
Whilst an interest rate hike is usually expected when there’s an increase in inflation, a weakening economy typically leads to a cut in interest rates. With these two issues to consider, it’s likely to be a difficult decision for the MPC. Experts are currently predicting that the Bank of England base rate will remain on hold.
How will mortgage rates be affected?
Lenders use swap rates when pricing their mortgage products. When the Middle East conflict began, the instability led to an increase in swap rates. As a result, major mainstream lenders reacted by increasing their fixed mortgage rates at the beginning of March. These rates rose to above 5%. Smaller providers had no choice but to temporarily withdraw their fixed-rate products.
Swap rates have now come down from their peak in March. In response, several lenders have begun lowering their interest rates slightly. Whilst these are only small changes, they are at least a step in the right direction.
With the full impact of the conflict yet to be felt, it’s expected that rates will continue to stay higher for longer due to the increased inflationary pressure.
Seek expert advice from our mortgage brokers
If your existing deal is coming to an end in the next 6 months, it’s a good idea to lock in a new rate now. This protects you in case mortgage rates rise in the future. You can always change it again if a better rate becomes available before your new deal starts but you’ll have peace of mind that you’ve secured a new rate for now. Call our expert mortgage brokers on 01322 907 000 for impartial advice and discover the mortgage options available to you.