British small and medium-sized businesses are facing renewed pressure on their margins after official figures showed inflation rose to 3.3 percent in March, the first clear evidence of how the Middle East conflict is affecting the real economy.
Data released on Wednesday by the Office for National Statistics showed the consumer price index rose from 3 percent in February, in line with City forecasts and marking the first increase in the overall rate since December. It is also the first inflation reading to reflect the rise in global oil and gas prices since hostilities broke out two months ago. Brent crude rose about 30 percent and traded around $100 a barrel for several weeks.
The pain from the pump was unmistakable. Petrol rose 8.6p a liter to an average of 140.2p, the highest since August 2024, while diesel, the lifeblood of the transport and craft sector, rose 17.6p to 158.7p, a level not seen since November 2023. For the country’s 5.5 million SMEs, many of which rely on vans, trucks and company cars to serve customers, this amounts to a significant and largely uninsurable operating cost.
Airfares caused additional excitement, rising by 10 percent compared to the previous month, while they had fallen by 0.3 percent in the same period last year. That’s the biggest February-March rise since 2016, although the ONS noted the prices were charged before the outbreak of war and were inflated by the timing of long-haul flights just after Easter.
Grant Fitzner, chief economist at the ONS, said: “Inflation rose in March, largely due to higher fuel prices, which recorded their sharpest increase in over three years. Alongside rising food prices, another booster was airfares this month. The only notable offset came from clothing costs, prices of which rose by less than this time last year.”
Economists at the International Monetary Fund and elsewhere have warned that key interest rates could rise over the summer, potentially reaching a peak above 5 percent, more than double the Bank of England’s 2 percent target. Core inflation, which excludes the volatile food and energy components, fell slightly to 3.1 percent from 3.2 percent, but services inflation, Threadneedle Street’s most closely watched measure, rose to 4.5 percent from 4.3 percent. Food prices were 3.7 percent higher year-over-year, a figure that will impact hospitality margins.
The Bank of England’s monetary policy committee is expected to keep interest rates at 3.75 percent at its meeting next Thursday, although rate setters face an uncomfortable dilemma. Martin Beck, chief economist at WPI Strategy, said: “With inflation likely to remain above target for some time to come, the Bank of England is unlikely to cut interest rates any time soon. But the case for further tightening also remains weak. A prolonged period of interest rate policy seems 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, went a step further, arguing that the Bank “cannot risk appearing complacent and we therefore expect a precautionary rate hike (of a quarter point) in the coming months.” Such a move would raise the cost of variable-rate borrowing for millions of homeowners and small business owners, setting back those trying to get on the housing ladder.
However, there are signs of resilience. GDP grew by a stronger-than-expected 0.5 percent in February and unemployment unexpectedly fell to 4.9 percent in the three months to February (from 5.2 percent), suggesting that the labor market is holding steady, at least for now, despite the external shock.
Chancellor Rachel Reeves said sympathetically: “This is not our war, but it is driving up bills for families and businesses. That’s why keeping costs down is my top priority.” The Treasury has so far extended support to a limited number of rural households dependent on heating oil and expanded an existing program to cut energy bills for businesses, although SME lobby groups are already pushing for more targeted relief for companies whose fuel and logistics costs cannot be easily passed on to customers.
For UK SMEs, the immediate message from March’s data is clear: energy-driven cost inflation is back, a rate cut is further away than many had hoped, and the next phase of the Middle East conflict will impact the cash flow and investment outlook as much as anything decided at Westminster.
