UK Inflation Is Back Above 3%. The Harder Problem Is Growth

22nd Apr 2026
UK inflation rose to 3.3% in March 2026, up from 3.0% in February, according to the Office for National Statistics. That is the headline. The harder part is what sits alongside it: weaker growth, higher business costs and a Bank of England that cannot deal with an imported energy shock as neatly as it would handle a demand-led inflation surge. In its March minutes, the Monetary Policy Committee said conflict in the Middle East had pushed up global energy and other commodity prices, that CPI inflation would be higher in the near term as a result, and that it was also assessing the weaker activity likely to follow from higher energy costs. The IMF’s latest forecast puts UK growth at 0.8% in 2026. That is why this print matters. Britain is not facing a clean inflation problem. It is facing higher prices and weaker momentum at the same time. The immediate driver was fuel. The ONS said motor fuels made the largest upward contribution to the increase in the annual rate. CPI rose 0.7% on the month in March, versus 0.3% a year earlier, while transport inflation accelerated to 4.7% from 2.4% in February. Petrol prices rose 8.6 pence per litre between February and March, and diesel rose 8.8 pence, taking both to their highest levels since August 2024. Those figures explain why the headline number moved. They do not explain, on their own, why the growth backdrop now matters more than the inflation headline alone. (ons.gov.uk) The bigger issue is how far the shock travels through the rest of the economy. The shock has come out of the Middle East conflict, and the problem for firms is not simply that energy prices have risen, but that nobody can say with much confidence how long the conflict will run or where oil finally settles once the immediate military and shipping risks fade. The Bank has already said the conflict is feeding through into households’ fuel and utility prices and into business costs more broadly. That pressure does not stop at the pump. It moves into logistics, freight, imported inputs and distribution. A prolonged energy shock can also create more specific supply problems. Reuters reported in March that the UK had to move to reopen a domestic CO2 plant because gas prices driven by the Iran conflict, along with disruption to European production, put British CO2 supply at risk. CO2 is vital in food and drinks manufacturing and is widely used in beverage carbonation and in food freezing, chilling and packing. Packaging and chilling matter because they help preserve products and extend shelf life. If CO2 supply tightens and costs rise there too, some food and consumer product prices can come under further pressure. At that point, firms have to decide whether to absorb the increase, cut elsewhere, or pass it on. When labour has already become more expensive because of higher employer NICs, there is less room to absorb. The March data does not prove that a broad second-round inflation cycle is under way, but it does show an external energy shock landing in an economy where domestic cost discipline was already harder to maintain. (bankofengland.co.uk, reuters.com) That domestic backdrop deserves more scrutiny than it usually gets in same-day inflation coverage. Since 6 April 2025, the employer Secondary Class 1 NICs rate has risen from 13.8% to 15%, while the secondary threshold has been cut from £9,100 to £5,000 a year. The government did raise the maximum Employment Allowance from £5,000 to £10,500 and removed the old £100,000 eligibility cap, which cushioned the effect for many smaller employers. Even so, the broad direction is clear. The tax system has made payroll more expensive for a large part of the business base at the same time as growth has weakened and energy costs have become more volatile. That is not a pro-growth mix. (gov.uk) The OBR’s own language makes the point harder to dodge. In its March 2026 Economic and Fiscal Outlook, it said nominal weekly wage growth was expected to slow in part because of “the gradual pass-through of more of last year’s rise in employer National Insurance contributions,” and that real pay growth had slowed from 2.5% in 2024 to below 1% in late 2025. That matters because it suggests the NIC rise is not sitting harmlessly on business balance sheets. It is feeding into wages, margins and hiring conditions. If the goal is stronger growth, taxing employment more heavily was always a risky choice. It looks even riskier once an external energy shock arrives on top of it. (obr.uk) This is where the growth story becomes more important than the inflation headline itself. A standard inflation overshoot in a strong economy leaves a central bank with a relatively simple script: demand is firm, prices are running too hot and policy needs to stay tight. That is not the present situation. The Bank kept Bank Rate at 3.75% in March and made clear that monetary policy cannot influence global energy prices directly. What it can do is lean against the risk that higher fuel and utility costs start to feed into broader domestic inflation. But raising rates harder into an imported energy shock and a weaker growth backdrop carries its own cost. It risks squeezing domestic demand further without doing much to reverse the original source of the price rise. For businesses, this leaves a very practical problem. Fuel and energy costs rise first. Payroll taxes are already higher than they were before April 2025. Consumer demand is not strong enough to guarantee an easy pass-through of costs. The IMF’s 0.8% growth forecast is not a recession call, but it is weak enough to make pricing decisions harder and hiring decisions more cautious. Firms with strong pricing power may manage. Firms with tight margins, large transport exposure or labour-intensive cost bases will feel the squeeze much sooner. This is why March’s inflation print should be read as a margin story as much as a macro story. (imf.org) There is also a policy credibility issue in the background. The government cannot talk credibly about growth while treating taxes on employment as if they are neutral. They are not. Employer NICs feed directly into hiring, hours, pay settlements and the willingness to expand. The continued freeze in personal tax thresholds adds another drag on household purchasing power even if it is not a business tax in the narrow sense. Set beside weaker growth and an energy shock, that leaves the economy less resilient than it ought to be. Regulatory reform may help at the margins, but a future promise of lower friction is not the same thing as reducing current cost pressure on payrolls and operating budgets. ( The most useful way to read the March inflation number, then, is not simply that fuel pushed CPI to 3.3%. The deeper problem is that Britain entered this shock with a weak growth profile and a domestic policy mix that had already made life harder for employers. An external energy shock was always going to hurt. It hurts more when the tax system has already raised the cost of labour and when demand is too soft to make price pass-through painless. That is the combination businesses, investors and policymakers should focus on now. What matters next is whether this remains a narrow energy hit or spreads further. Before the latest shock, the Bank’s February Monetary Policy Report said CPI was expected to fall back to around the 2% target from April and remain close to that level over the forecast period. After the Middle East conflict and the rise in energy prices, the March minutes said that return would be delayed, with CPI now expected to be between 3% and 3.5% over the next couple of quarters and potentially up to 3.5% in Q3. If energy markets stabilise and the knock-on effects stay limited, March may come to look like the first hard hit rather than the start of a much broader price spiral. But even a ceasefire would not guarantee a quick return to pre-conflict cost levels, especially if disruption to supply, shipping and industrial inputs takes time to unwind. Either way, the Bank’s own position is now less tidy than it was a few weeks ago: the old expectation of inflation dropping back around target has been pushed out, while the new promise is only that policy will do what is needed to get inflation back to 2% in the medium term. That is a much harder environment for the Bank, for markets and for firms than the headline number alone suggests. 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