Tag: Inflation

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UK borrowing costs hit 28-year high: is austerity about to return? Did it ever leave?

UK and World Debt

Britain’s fiscal squeeze is becoming increasingly difficult to ignore. The yield on the UK’s 30-year gilt has climbed to 5.89% — its highest level since 1998 — while the 10-year yield has risen to around 5.25%.

The immediate trigger is largely global: higher oil prices, renewed inflation fears and a worldwide bond sell-off. But Britain has an additional problem: an already stretched public finances position.

Tax, borrow or austerity – the familiar story

The timing could hardly be worse. Higher gilt yields mean higher future borrowing costs and, importantly, higher projected debt-interest payments.

Current estimates suggest that the rise in yields could roughly halve the Chancellor’s fiscal headroom, from around £26bn to about £13.8bn.

That leaves the government with an increasingly familiar choice: raise taxes, restrain spending, borrow more — or accept another round of austerity.

Burgeoning welfare

Welfare is inevitably part of the debate. UK welfare spending is enormous, projected at around £353bn in 2026-27, although more than half goes towards pensioners and the State Pension rather than working-age benefits.

The working-age and health-related components are nevertheless growing rapidly, creating a genuine long-term fiscal challenge.

But blaming welfare alone would be misleading. Debt interest itself has become a major burden. Public-sector net debt was around 95% of GDP in mid-2026, while debt-interest costs have been among their highest levels for decades.

The circle of failure

This is the vicious circle facing Britain: slow growth limits tax revenues; high spending increases borrowing; higher borrowing costs increase debt interest; and higher interest costs leave less money for public services and investment.

So is austerity coming back? Perhaps it never really left. The difference now is that governments are attempting to squeeze an increasingly expensive state while simultaneously trying to protect living standards and stimulate growth.

The October 2026 Budget may therefore be less about political ambition and more about how much pain the bond market will allow Britain to avoid.

Servicing debt

Borrowing costs in the U.S., Japan and Europe have hit similar highs in recent days, reflecting investors’ concerns about inflation, state borrowing levels and spending levels by large tech companies on AI.

World debt is a growing problem too

To be fair, rising yields and higher debt levels are not just a UK problem. France has its share of the burden, Japan, the EU and the U.S. too.

No one is immune to rising yields and debt.

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EU Inflation Surges as Energy Costs Bite

Inflation has returned as an unwelcome problem for Europe, with eurozone consumer prices rising by 3.3% in August 2026, according to Eurostat’s latest flash estimate.

That was a significant increase from 2.9% in July 2026 and puts inflation well above the European Central Bank’s 2% target.

Energy inflation up

The main culprit is energy. Annual energy inflation surged to 14.3%, up from 10.3% a month earlier, highlighting how quickly geopolitical tensions and energy markets can feed through into household bills and business costs.

There was, however, some better news beneath the headline figure. Services inflation eased to 3.0% from 3.30%, suggesting some underlying price pressures may be cooling.

Room for interest increase

The problem for the ECB is timing. Interest rates are already relatively low, but renewed inflation makes further cuts harder to justify.

Europe could therefore face an uncomfortable combination of higher prices and weaker growth — the very conditions policymakers would rather avoid.

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France’s Debt Problem: Borrowing Costs Are Becoming a Big Concern

France and Debt

France is facing growing pressure from financial markets as the cost of servicing its enormous public debt continues to rise.

The problem is not simply the size of the debt, but the combination of high borrowing requirements, weak economic growth, political uncertainty and increasingly expensive interest payments.

France’s debt

France’s public debt is expected to reach around 118% of GDP in 2026, rising above 120% in 2027, according to the European Commission.

Meanwhile, the budget deficit is forecast to remain at around 5.1% of GDP this year, well above the European Union’s 3% limit.

Investors are now demanding higher returns to hold French government bonds. The yield on the benchmark 10-year French OAT recently moved above 4%, reaching levels not seen since the late 2000s.

Yields

At the end of August 2026, the yield remained around 4.1%, while the equivalent German Bund was closer to 3.25%.

That difference matters. The wider the gap between French and German borrowing costs, the greater the risk premium investors are demanding from Paris.

France’s spread has recently approached 90 basis points, reflecting concerns over its fiscal position and political uncertainty ahead of next year’s presidential election.

Danger signs

The danger is a potential “debt snowball”. As older, cheaper bonds mature, France must refinance them at today’s higher rates.

Interest payments therefore consume an increasing share of government revenue, potentially forcing Paris to borrow even more.

The European Commission reportedly expects French interest payments to rise from 2.2% of GDP in 2025 to 2.6% in 2026 and 2.8% in 2027.

France is not facing an immediate sovereign default, but markets are clearly demanding greater fiscal discipline.

The crucial question is whether politicians can agree on spending cuts and tax measures before rising interest costs become a much larger problem.

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Jackson Hole: U.S. Rate Hike Fears Return

The 2026 annual Jackson Hole meeting has delivered a clear warning to financial markets: U.S. interest rates may not be heading lower… just yet.

Federal Reserve Chair Kevin Warsh used his first major Jackson Hole speech to stress that inflation remains too high and that recent improvements have not been enough to convince policymakers that price pressures are returning sustainably towards the Fed’s 2% target.

Warsh also suggested that current financial conditions are not sufficiently restrictive, raising the possibility that further interest-rate increases could be required.

Interest rate increase more likely?

Markets reacted quickly, with the probability of a September 2026 rate rise climbing to around 60%, compared with roughly 35% before his speech.

The message is particularly significant because investors had been hoping for lower borrowing costs. Instead, attention has shifted towards whether stubborn U.S. inflation will force the Fed to tighten policy again.

With the September 2026 meeting approaching, upcoming inflation and employment figures could prove crucial in determining the next move.

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U.S. Inflation Remains Stubbornly High

U.S. inflation is sticky

Fresh U.S. inflation figures released on 26th August have delivered an unwelcome reminder that the battle against rising prices is far from over.

The Federal Reserve’s preferred measure, the Personal Consumption Expenditures (PCE) price index, rose 3.7% in July compared with a year earlier, unchanged from June 2026 and above economists’ 3.6% forecast.

Core PCE, which strips out volatile food and energy costs, also remained stubborn at 3.3%, while prices increased 0.2% during July.

Above target of 2%

The figures leave inflation well above the Fed’s 2% target and could complicate expectations for interest-rate cuts. Markets have even increased the possibility of another rate rise later this year.

There was some encouragement elsewhere: personal income increased 0.4% in July 2026, while real consumer spending was broadly flat.

For the Fed, however, the message is clear: inflation is proving sticky, and cutting rates too quickly could risk reigniting price pressures.

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UK Inflation Turns Higher Again as Energy Costs Bite

UK inflation data July 2026

The UK’s inflation rate has moved higher again, providing an unwelcome reminder that the battle to bring prices under control is far from over.

Consumer price inflation rose to 2.9% in July 2026, up from 2.6% in June and moving further above the Bank of England’s 2% target.

The increase was largely driven by higher household energy costs following the latest rise in the energy price cap.

Not all negative

Gas prices increased sharply, putting renewed pressure on household budgets and pushing housing and household services inflation higher. For millions of families, the effect will be felt directly through larger energy bills.

However, the figures are not entirely negative. Food inflation eased to 1.3%, while services inflation fell from 3.6% to 3.4%. Core inflation, which strips out some of the more volatile components, remained at 2.6%.

Bank of England dilemma

That creates a difficult picture for the Bank of England. Inflation is moving in the wrong direction, but some of the underlying pressures are continuing to moderate.

The latest figures therefore make further interest-rate cuts more complicated. The Bank will want to avoid reigniting inflation, while also recognising that higher borrowing costs can weigh heavily on an already fragile economy.

For consumers, however, the message is simpler: the cost-of-living squeeze is easing, but it certainly isn’t over.

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U.S. Inflation Cools as July Prices Rise Just 0.1%

U.S. Inflation data

U.S. inflation offered investors some modest reassurance in July 2026, with consumer prices rising just 0.1% during the month, exactly in line with economists’ expectations.

The increase left annual inflation at 3.4%, down slightly from 3.5% in June.

The figures suggest that inflationary pressures are continuing to ease, although perhaps not quickly enough for the Federal Reserve to declare victory.

Core inflation

Core inflation, which excludes volatile food and energy prices, increased 0.2% during July 2026 and stood at 2.5% annually. Falling energy costs helped restrain the headline figure, while shelter and food prices recorded modest increases.

For Wall Street, the absence of an inflationary surprise was broadly welcome. Investors have become particularly sensitive to inflation data because of its implications for Federal Reserve interest-rate policy.

A stronger-than-expected figure could have revived fears that rates would need to remain higher for longer.

Flexibility

Instead, the relatively subdued reading leaves the Fed with greater flexibility. U.S. markets largely shrugged off the report, suggesting much of the result had already been priced into shares.

Technology and other growth stocks could benefit if U.S. inflation continues to moderate, since lower bond yields and expectations of easier monetary policy generally make their future earnings more attractive.

However, 3.4% inflation remains comfortably above the Federal Reserve’s 2% objective. Investors therefore have reason for optimism, but not complacency.

For U.S. stocks, July’s message was encouragingly simple: inflation is cooling, but the battle is not over.

But it appears this AI driven market doesn’t seem to care about any news at the moment.

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Summer Markets Poised for a Reality Check as Optimism Collides with Fragility

The probability of a summer correction in US equities is high

U.S. stocks have entered the summer with a confident stride, buoyed by softer inflation data and a fresh wave of enthusiasm for AI and Chip linked earnings.

Futures are rising, headlines are upbeat, and investors appear convinced that the worst of the tightening cycle is behind them.

Foundation

Yet beneath the surface, the market’s foundations look increasingly uneven — and that imbalance is precisely what makes a seasonal correction more likely than many expect.

The latest market action shows how sentiment can be shaped by single data points. A “soft inflation reading” has lifted futures, encouraging hopes of a gentler Federal Reserve.

But this sits awkwardly alongside the Fed’s own messaging: Chair Warsh has openly pledged a “regime change” in policy to eliminate the inflation “tax” on households, a stance that hardly suggests imminent easing.

When monetary policy becomes less predictable, equity valuations — especially in tech — become more vulnerable.

Leaders & Losers

At the same time, leadership in the market has narrowed dramatically. AI‑exposed names continue to surge, with ASML jumping more than 7% after raising its sales forecast again.

CrowdStrike, Goldman Sachs and Palo Alto Networks are among the recent biggest movers. Yet the other end of the tape tells a different story: IBM has suffered a record 25% plunge, Biogen is down sharply, and several consumer‑facing names are showing unusual volume on steep declines.

This split between winners and laggards is characteristic of late‑cycle behaviour.

Seasonally, July and August are already the market’s weakest stretch. Liquidity thins, volatility picks up, and geopolitical risks — from Middle East tensions to Europe’s drone‑driven defence pivot — add further instability.

Too Bullish

Even Bank of America warns that investors are “too bullish” heading into summer.

Put together, the picture is clear: optimism may dominate the headlines, but the underlying market structure suggests a correction is not only possible — it is increasingly probable.

What the latest evidence shows

The search results give a very clear picture: market structure is weakening beneath headline highs, and several institutions are openly warning about a summer drawdown.

1. Breadth collapse (the biggest red flag)

Sources show the S&P 500’s rally is being carried by a tiny handful of AI mega‑caps:

  • Median S&P 500 stock is 13% below its 52‑week high even as the index hits records.
  • Equal‑weight S&P 500 is down ~1% while the cap‑weighted index is up double digits.
  • Semiconductors +30%, Magnificent 7 +10%, “everything else on the curb.”

This is classic late‑cycle behaviour. Historically, this level of narrowness precedes larger‑than‑average drawdowns over 6–12 months (Goldman Sachs cited).

2. Technical overextension

Multiple sources highlight:

  • RSI above 70 for weeks (overbought).
  • Negative divergence: price makes new highs, RSI makes lower highs — seen at 2018, 2020, 2021 tops.
  • VIX at long‑term lows and “set up for a bullish swing,” which usually means S&P 500 downside.

3. Seasonality: worst window of the year

Summer (July–August 2026) is historically the weakest period for US equities due to:

  • Low liquidity
  • Higher volatility
  • Higher probability of corrections

This is explicitly flagged in multiple sources.

4. Fed uncertainty

The new Fed Chair (Warsh/Walsh) has taken a hawkish stance, removing forward guidance and signalling possible rate hikes:

  • Markets now price a 60% chance of a hike in October.
  • Higher rates → lower valuations → tech most exposed.

Liquidity contraction is also highlighted as the biggest near‑term risk (Morgan Stanley).

5. Institutional forecasts

  • Bank of America: warns of a 6% summer correction.
  • MarketBeat: warns of a potential 20% correction in H2 2026 (less consensus and unlikely, but notable).
  • Real Investment Advice: says risk is “stacking up” with breadth collapse + worst seasonal window + political cycle.

Are we facing a correction?

Yes — the probability is high likely. The convergence of:

  • collapsing breadth
  • overbought technicals
  • seasonal weakness
  • Fed uncertainty
  • narrow AI‑driven leadership

…makes a summer correction the base case, not an outlier.

The most credible range is –6% to –10%, with tail‑risk scenarios pointing deeper.

What matters most for the next 4–8 weeks (Summer 2026)

  • Watch VIX — a spike will confirm the correction.
  • Watch oil prices — a rebound could reignite inflation and force Fed tightening.
  • Watch semiconductors — they’re the rally’s spine; any wobble cascades.
  • Watch Treasury yields — curve flattening already signals stress.

Quick comparison table

IndicatorCurrent SignalImplication
Market breadthExtremely narrowHigh correction risk
RSI / technicalsOverbought, negative divergenceShort‑term pullback likely
SeasonalityWorst window of yearVolatility amplified
Fed stanceHawkish shiftValuation pressure
Institutional forecasts–6% to –20%Correction probable
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U.S. inflation delivered a rare moment of clarity

U.S. inflation

U.S. June’s 2026 U.S. inflation report showed an unexpected cooling, with headline CPI dropping 0.4% month‑on‑month and annual inflation easing to 3.5%, driven almost entirely by a steep fall in energy prices.

Core inflation was flat, bringing the yearly core rate down to 2.6%.

Why this report mattered

This was the final major inflation release before the Fed’s late‑July meeting. Markets had expected a softer print, but the scale of the energy‑driven decline surprised forecasters.

The underlying trend (flat core inflation) suggests cooling, but geopolitical risks mean July’s 2026inflation could rebound.

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U.S. jobs market cools in June

Hiring slows for the U.S. in June 2026

The latest U.S. jobs report underscored a clear cooling in labour market momentum, with June’s 2026 nonfarm payrolls rising by just 57,000, well below economists’ expectations and marking the weakest gain in four months.

And this despite an expected job boost as the U.S. hosts a highly successful record-breaking Football World Cup.

Although the headline unemployment rate dipped to 4.2%, this improvement was largely cosmetic: the labour force participation rate fell to 61.5%, its lowest level since March 2021, meaning fewer people were counted as actively seeking work.

Beneath the surface, the household survey painted a more troubling picture. Employment dropped sharply, with 507,000 fewer people reporting they were at work, and revisions to earlier months erased 74,000 previously reported jobs — undercutting the narrative of springtime strength.

Leisure and hospitality suffered a notable setback, shedding 61,000 positions, while gains were concentrated in a narrow band of sectors: professional and business services (+36,000), social assistance (+25,000), and healthcare (+22,000).

Financial markets reacted cautiously, with investors trimming expectations of a Federal Reserve rate rise in September 2026.

Overall, the data reportedly suggests a labour market losing steam, shaped more by statistical quirks and workforce exits than by genuine economic resilience.

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UK and U.S. economic data roundup as of week ending 19th June 2026

UK U.S. June 2026 economic data

United Kingdom – Latest Data This Week to June 19th 2026

Labour market:

  • The UK unemployment rate for April 2026 held at 4.9%, slightly below the previous 5% reading. Average earnings including bonuses grew 4.4%, while earnings excluding bonuses rose 3.4%. Employment increased by 100,000 in April, although HMRC payrolls for May showed only a marginal +2,000 change.

Retail sales:

  • Retail sales rebounded strongly in May 2026, rising 1.2% month‑on‑month and 3.2% year‑on‑year, reversing April’s declines. Retail sales excluding fuel also rose 1.2% MoM and 4.6% YoY.

Public finances:

  • Public sector net borrowing (excluding banks) came in at £23.3bn in May, slightly worse than April’s revised figure.

Business activity:

  • Flash PMIs for June show mixed momentum:
    • Manufacturing PMI: 53.9 (expansion)
    • Services PMI: 49.3 (contraction)
    • Composite PMI: 49.7 (borderline contraction) These readings suggest the UK economy is losing some pace heading into summer.

United States – Latest Data This Week to 19th June 2026

Labour market:

  • Initial jobless claims for the week ending 13th June 2026 fell slightly to 226,000, broadly in line with expectations. Continuing claims rose to 1.81 million, indicating some softening in labour market conditions.

Manufacturing & business surveys:

  • The Philadelphia Fed Manufacturing Index jumped to 10.3 in June from –0.4, signalling a notable improvement in factory activity.
  • The S&P Global flash PMIs for June show:
    • Manufacturing: 55.1 (solid expansion)
    • Services: 50.7 (modest expansion)
    • Composite: 51.5 (steady growth) These point to a resilient US private‑sector backdrop.

Housing & consumer indicators:

  • Mortgage rates eased slightly, with the 30‑year rate dipping to 6.47%.
  • Redbook retail sales rose 9.4% YoY, suggesting firm consumer spending.

Capital flows & energy:

  • Net long‑term TIC flows for April registered $103.1bn, indicating strong foreign demand for US assets.
  • API data showed a sharp –8.33 million barrel draw in crude oil stocks, hinting at tighter near‑term supply.

Overall Pictures for UK and U.S.

  • UK: A mixed week — labour market steady but softening at the margins; retail sales surprisingly strong; PMIs signalling a mild loss of momentum; public borrowing still elevated.
  • US: Data broadly stronger — manufacturing rebounded, services steady, jobless claims stable, and consumer spending indicators show firm.
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ECB Interest Rate Hike to 2.25% and UK GDP Contracts 0.1%

Slow UK Growth for April 2026

The European Central Bank jolted markets yesterday with its first interest‑rate increase since 2023, a move driven by renewed energy‑price pressures linked to the U.S./Iran conflict.

Policymakers signalled that the surge in wholesale gas and oil costs is feeding back into euro‑area inflation, forcing a return to tightening after more than two years of stability.

Investors had expected a cautious stance, but the ECB argued that delaying action risked inflation becoming embedded again, particularly in energy‑sensitive economies such as Germany and Italy.

The decision pushed bond yields higher across the bloc and strengthened the euro, reflecting expectations of a more hawkish path through the summer.

UK Lacklustre Growth

In the UK, fresh GDP data released by the ONS for April 2026 offered a more mixed picture. The economy expanded modestly, continuing the fragile recovery seen earlier in the year, but underlying momentum remains weak.

Services provided the bulk of the growth, while manufacturing and construction were broadly flat.

Economists warn that higher energy prices — the same shock driving the ECB’s decision — could weigh on UK output in the coming months, squeezing household budgets and raising costs for businesses.

Together, the ECB’s shift and the UK’s tentative growth figures underline how vulnerable Europe remains to global energy disruptions.

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UK Data Trio Offers Mixed Signals on Prices, Public Finances and Growth – Storm Clouds Gather

UK Economic data April 2026

The UK’s latest run of economic data has delivered a contradictory picture: inflation easing sharply, borrowing surging, and growth outperforming expectations.

Together, the figures show an economy stabilising in some areas while coming under renewed strain in others.

Inflation (CPI)

April CPI fell to 2.8%, down from 3.3% in March, the lowest rate in nearly three years.

The drop was driven by Ofgem’s April energy price cap, which cut household gas and electricity bills, alongside softer rises in water charges, road tax and several food categories.

But economists warn the relief will be temporary. Wholesale energy prices have risen sharply since the U.S. / Iran conflict escalated, and inflation is expected to climb back above 4% later in the year.

The Bank of England is therefore likely to remain cautious about cutting rates.

Forecast out of sync

Government Borrowing (April 2026) The borrowing picture was far less encouraging. The government borrowed £24.3 billion in April — the highest April figure since 2020 and well above the £20.9 billion forecast by the OBR.

Borrowing was £4.9 billion higher than the same month last year, driven by inflation‑linked increases in benefits, the earnings‑linked rise in the state pension, and record April debt‑interest payments of £10.3 billion in 2026.

Analysts note that this deterioration comes before the full impact of the energy‑price shock is felt, raising concerns about the fiscal outlook for the rest of the year.

Growth

GDP Growth The bright spot came from growth: the economy expanded 0.3% in March 2026, beating expectations of a slight contraction, and delivered 0.6% growth for Q1 — the fastest among G7 countries reporting so far.

However, the ONS highlights that much of March’s strength reflected “front‑loading” of spending ahead of expected price rises linked to the Iran war, suggesting momentum may fade as higher energy and fuel costs feed through.

This data comes as the global economy waits for the full impact of the U.S. / Iran conflict to unravel.

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Euro zone inflation jumps to 3% as economic growth almost stalls

Euro Zone Inflation Pressure April 2026

Euro zone inflation accelerated sharply in April 2026, rising to 3%, as the bloc’s economy barely grew — a combination that deepens fears of a stagflationary year.

The latest flash estimate from Eurostat shows headline inflation climbing from 2.6% in March, driven overwhelmingly by surging energy costs linked to the U.S./Iran war and the ongoing disruption in the Strait of Hormuz.

Energy

Energy inflation jumped to 10.9%, more than double the previous month’s rate, underscoring how exposed the currency bloc remains to external supply shocks.

Core inflation, however, edged down to 2.2%, offering a small reassurance that second‑round effects — wage‑price spirals — have not yet taken hold.

Growth was anaemic. First‑quarter GDP expanded by just 0.1%, reflecting weak industrial output, fragile consumer confidence, and higher input costs for businesses.

Stagnation

Economists warn that the combination of rising prices and near‑stagnant activity risks pushing the region into a period of low‑growth, high‑inflation pressure.

The figures land just ahead of the European Central Bank’s policy meeting. With inflation above target but growth faltering, the ECB faces a difficult balancing act.

Policymakers are widely expected to hold rates at 2%, wary that tightening into a supply‑driven shock could deepen the slowdown.

For now, the data reinforce a picture of a euro zone squeezed by global energy turmoil and struggling to regain momentum.

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UK Borrowing Falls, Offering Treasury Some Relief – March 2026

UK borrowing falls

The latest public finance figures show that government borrowing has dropped to a lower‑than‑forecast level, helped by stronger tax receipts and easing inflationary pressures.

While the precise numbers will be scrutinised in the coming days, the headline outcome marks a modest but meaningful improvement in the UK’s fiscal position.

Softer inflation and lower interest rates

Analysts note that softer inflation has reduced the government’s debt‑interest bill, particularly on index‑linked gilts, which had surged during the inflation spike of the past two years.

The fall in borrowing also reflects a stabilising labour market and firmer wage growth, which have supported income‑tax and National Insurance receipts.

At the same time, lower market interest rates — driven by expectations of further Bank of England cuts after recent reductions to 3.75% — have eased short‑term financing costs for the Treasury.

High debt level

However, economists caution that the improvement should not be overstated. UK debt remains historically high, and pressures on public services, welfare spending, and capital investment persist.

Moreover, with growth still subdued and geopolitical risks keeping energy markets volatile, the fiscal outlook remains vulnerable to external shocks.

Even so, today’s figures provide the Chancellor with a welcome narrative shift: after years of deteriorating public finances, the government can point to early signs of stabilisation — albeit from a challenging starting point.

What the real data shows (ONS, published 23rd April 2026)

The latest ONS release confirms that UK government borrowing has indeed come in lower than expected, and the scale of the improvement is now clear:

  • Annual borrowing: £132.0 billion in the year to March 2026 — £19.8 billion lower than the previous year — £0.7 billion below the OBR forecast — Lowest level since 2022–23
  • March borrowing: £12.6 billion — £1.4 billion lower than March 2025 — Lowest March figure since 2022
  • Borrowing as % of GDP: — 4.3%, the lowest since 2019–20

The U.S./ Iran / Israel conflict with undoubtably hold the economy back as the effect has yet to fully filter through.

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UK inflation rose to 3.3% in March 2026 as fuel prices spiked due to the ongoing U.S. Iran war

UK March inflation up to 3.3%

UK inflation jumped to 3.3% in March 2026, driven primarily by a sharp surge in fuel prices linked to the Iran conflict.

UK inflation accelerated to 3.3% in March 2026, up from 3% in February 2026, marking the first clear evidence of the Iran‑U.S. conflict feeding through to consumer prices.

Fuel costs

Official ONS data shows that motor fuel costs were the dominant driver, with petrol and diesel prices rising at their fastest pace in more than three years as global energy markets reacted to the disruption in the Strait of Hormuz.

Air fares

Air fares also rose sharply, partly due to the early Easter holidays, while food inflation picked up again, including notable increases in sweets and chocolate.

Clothing discounted

Clothing provided the only meaningful offset, with retailers discounting more heavily than last year.

The rise pushes inflation further from the Bank of England’s 2% target and complicates the policy outlook.

While economists expect UK inflation to ease slightly in April 2026, the broader risk is that sustained energy pressures could keep price growth elevated for longer.

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The UK economy experienced faster-than-expected growth in the period leading up to the Iran war – February 2026

UK Growth of 0.5% in February 2026

The ONS’s February 2026 figures delivered a rare upside surprise: UK GDP rose 0.5% month‑on‑month, the strongest expansion in more than two years and five times the consensus forecast of 0.1%.

How can forecasts be so wrong?

January2026 was also revised up to 0.1%, overturning the earlier flat reading. On the surface, this looks like the economy finally pulling out of its shallow recession.

In reality, it is a snapshot of momentum that has already been overtaken by events.

Services mani

The growth was broad‑based. Services, which make up over three‑quarters of the economy, expanded 0.5%, marking a fourth consecutive monthly rise.

Production also grew 0.5%, and construction jumped 1.0%. Even the three‑month measure—less noisy than monthly data—showed UK GDP up 0.5%, compared with 0.3% previously. This is the kind of balanced improvement policymakers have been waiting for.

But the timing matters. These numbers capture the economy before the U.S.-Israel-Iran conflict triggered a fresh energy shock at the end of February.

IMF downgrade

Since then, petrol, diesel and heating oil prices have surged, mortgage rates have ticked higher as markets price out rate cuts, and the IMF has downgraded the UK’s 2026 growth outlook to 0.8%.

So February’s strength is real—but it is also backward‑looking. The challenge now is whether any of that momentum survives the shock hitting households and firms this spring.

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UK economy will be hit hardest by the U.S.-Israel Iran war warns the IMF

UK Economy damaged by U.S. Iran War

The IMF’s warning that the UK would suffer the sharpest growth hit among rich economies from an Iran‑related war is rooted in a simple structural reality.

Britain is unusually exposed to energy‑price shocks, yet unusually weak in the buffers that normally absorb them according to the IMF.

Why the UK will be hit harder than its peers

The UK enters this crisis with three vulnerabilities

  • High dependence on imported energy. North Sea output has declined for years, leaving Britain reliant on global LNG markets. When Middle Eastern supply is disrupted, LNG prices spike first and hardest. The U.S. and eurozone have deeper domestic energy bases or cheaper pipeline access.
  • A structurally fragile inflation profile. The UK’s inflation has been stickier than that of other G7 economies, driven by food, energy and services. A renewed oil shock feeds directly into household bills and transport costs, forcing the Bank of England to keep rates higher for longer.
  • Weak productivity and stagnant investment. Britain has less momentum to absorb an external shock. When energy prices rise, UK firms cut back faster, and consumers retrench more sharply.
  • UK Government policy. Ed Miliband and his ‘likely’ misguided staunch defence of Net Zero policies and expensive energy costs have left the UK seriously exposed to shocks – such as this.

The IMF’s logic

The Fund argues that a prolonged disruption in the Strait of Hormuz would push global oil prices sharply higher.

For the UK, this translates into

  • Higher wholesale gas costs, because LNG markets reprice off oil‑linked benchmarks.
  • A renewed inflation surge, delaying rate cuts and tightening financial conditions.
  • A squeeze on real incomes, hitting consumption—the UK’s main growth engine.
  • A fall in business investment, already one of the weakest in the OECD.

The IMF’s modelling suggests that the UK’s growth rate could fall more steeply than that of the U.S., Germany or France because those economies either have stronger industrial bases, more resilient energy systems or more fiscal space to cushion the blow.

The broader picture

This is less about geopolitics and more about structural brittleness. A global energy shock exposes the UK’s unresolved weaknesses: high import dependence, fragile inflation dynamics and a decade of under‑investment.

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U.S. Inflation Stays Stubborn at 3% as Geopolitical Tensions Rise

U.S. February Inflation 2026

America’s latest inflation figures show price pressures proving far stickier than the Federal Reserve would like, with the core PCE index — the Fed’s preferred gauge — holding at 3% in February 2026.

Headline inflation came in slightly lower at 2.8%, but both measures remain well above the central bank’s 2% target.

What makes this reading particularly significant is its timing. The data captures the state of the economy just before the U.S. and Israel launched military action against Iran.

Energy chaos

A conflict that has since sent global energy markets into turmoil. Oil briefly surged past $100 a barrel, and U.S. petrol prices jumped by more than a dollar, none of which is reflected in February’s figures.

Beneath the surface, the numbers paint a mixed picture. Consumer spending rose 0.5%, suggesting households were still willing to open their wallets, yet personal income unexpectedly slipped 0.1%.

Stagflation?

Fourth‑quarter GDP for 2025 was revised down to a sluggish 0.5% annualised, reinforcing concerns that the U.S. may be drifting into a mild stagflationary phase — slow growth paired with persistent inflation.

Fed officials have been cautious in recent weeks, signalling openness to rate cuts later in the year but unwilling to commit while geopolitical risks and energy‑driven price spikes cloud the outlook.

With March’s CPI due imminently — and expected to show a sharp jump — policymakers face a narrowing path between supporting a cooling labour market and preventing inflation from becoming entrenched.

For now, the message is clear: underlying inflation was already proving stubborn before the shock of war.

The next few months will reveal whether the Fed can still engineer the soft landing it has been aiming for, or whether the global energy shock forces a rethink.

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Eurozone inflation ticked higher in March 2026

Eurozone inflation

Eurozone inflation has risen for the first time in months, with the March 2026 flash estimate showing headline inflation at 2.5%, up from 1.9% in February.

The jump is driven almost entirely by a renewed surge in energy prices, which climbed 4.9% year‑on‑year.

Core inflation eased to 2.3%, reinforcing the view that underlying domestic pressures continue to cool despite the headline spike. Services inflation also softened slightly.

For the European Central Bank, the data introduce fresh uncertainty. While policymakers have been preparing markets for potential rate cuts later this year, the energy‑led rebound may force a more cautious move in the future.

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Steady February 2026 UK Inflation Masks Rising Risks from Iran Conflict

UK inflation before war shock filters through

The UK’s inflation rate remained unchanged at 3% in February, according to the latest figures from the Office for National Statistics.

After months of gradual easing, the pause reflects a delicate moment for the UK economy, with price pressures beginning to shift beneath the surface.

Clothing was the biggest upward driver, with prices rising this year after falling during the same period in 2025.

This was offset by cheaper petrol, though those figures were captured before the recent surge in global oil prices triggered by the outbreak of war involving Iran.

While inflation is far below the peaks seen a few years ago, households are still contending with the reality that prices continue to rise—just more slowly.

ONS data

The ONS also introduced supermarket scanner data for the first time, offering a more accurate picture of food costs.

Economists warn that the conflict‑driven spike in oil and gas prices could push inflation higher again later in the year, with some forecasts suggesting a potential rise towards 4.6%.

Businesses already reliant on fuel, such as regional bus operators, report steep cost increases that may soon feed through to consumers.

The government insists it is working to ease cost‑of‑living pressures, though global events may limit its room for manoeuvre.

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U.S. Core Wholesale Prices Jump 0.8% in January 2026, Raising Fresh Inflation Concerns

U.S. inflation

U.S. core wholesale prices rose 0.8% in January 2026, a sharper-than-expected acceleration that has renewed concerns about lingering inflationary pressures across the American economy.

The increase, reported by the Bureau of Labor Statistics, exceeded both December 2025’s 0.6% rise and the consensus expectation of 0.3%, marking one of the strongest monthly gains in recent months.

The core U.S. Producer Price Index (PPI), which strips out volatile food and energy components, is closely watched as an indicator of underlying cost pressures faced by businesses.

January’s jump suggests that inflationary forces remain embedded in key service sectors, even as goods prices continue to soften.

Indeed, services were the primary driver of the month’s overall wholesale inflation, with final demand services advancing 0.8%, while goods prices fell by 0.3% amid notable declines in gasoline and several food categories.

Divergence

This divergence between services and goods highlights a structural shift in inflation dynamics. Goods inflation has eased significantly as supply chains normalise and commodity prices stabilise.

By contrast, service-sector inflation—often tied to labour costs, logistics, and profit margins—has proven more persistent.

January 2026’s data underscores this trend, with strong increases in areas such as professional and commercial equipment wholesaling, telecommunications access services, and health and beauty retailing.

Complicates Inflation Outlook

For policymakers, the report complicates the inflation outlook. While headline PPI rose a more modest 0.5%, the strength of the core measure suggests that underlying pressures may not be cooling as quickly as hoped.

Markets had been anticipating a gradual easing that would give the Federal Reserve more confidence to consider rate cuts later in the year.

Instead, the January 2026 figures may reinforce a more cautious stance, particularly if upcoming consumer inflation data echoes the same pattern.

Businesses and consumers alike will be watching February 2026’s data closely to determine whether January represents a temporary spike or the beginning of a more stubborn inflation trend.

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U.S. Growth Slows Sharply as Q4 GDP at 1.4% – badly missed target

U.S. GDP 2025 Q4 at 1.4%

The United States economy lost momentum at the end of 2025, with fourth‑quarter GDP rising just 1.4%, a sharp deceleration from the 4.4% expansion recorded in the previous quarter.

The first estimate from the U.S. Bureau of Economic Analysis underscored a cooling backdrop that contrasts with the resilience seen through much of last year.

The slowdown was broad‑based. Government spending, which had previously provided a meaningful lift, swung lower.

Exports weakened

Exports also weakened, reflecting softer global demand and a less favourable trade environment.

Consumer spending — the backbone of the U.S. economy — continued to grow but at a more subdued pace, suggesting households are becoming more cautious as borrowing costs remain elevated. Although there has been some easing in U.S. mortgage rates.

Imports declined, which mechanically supports GDP, but the underlying signal points to softer domestic demand.

Analysts had expected a stronger finish to the year, with forecasts clustered closer to 2.5%.

The miss raises questions about the durability of U.S. growth heading into 2026, particularly as fiscal support fades and the effects of tighter monetary policy continue to filter through.

Q3 surge to Q4 slowdown

The contrast with the previous quarter is stark: Q3’s surge was driven by robust consumer activity, firmer government outlays, and a rebound in exports — dynamics that have since reversed.

Even so, the latest figures do not point to an imminent recession. Investment remains mixed rather than collapsing, and consumer spending is still contributing positively.

But the data does reportedly suggest the economy is entering a more fragile phase, where small shocks could have outsized effects.

For policymakers, the report complicates the Federal Reserve’s path. Inflation has eased but remains above target, and a softer growth profile may strengthen the case for rate cuts later in the year — though officials will want clearer evidence before shifting course.

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Japan’s Inflation Slips Below 2% for the First Time in Nearly Four Years

Low inflation in Japan

Japan’s inflation rate has dipped below the Bank of Japan’s long‑standing 2% target for the first time in almost four years, marking a notable turning point in the country’s post‑pandemic price cycle.

Official figures show headline inflation easing to 1.5% in January, ending a 45‑month stretch above the central bank’s benchmark.

Slowdown

The slowdown reflects a broad cooling in cost pressures that had dominated the Japanese economy since 2022. Food inflation has eased to a 15‑month low, while transport, healthcare, and household goods have all seen slower price growth.

Energy costs remain negative, helped by government subsidies that continue to cushion households from global fuel volatility.

Core inflation — which strips out volatile fresh food prices — has also softened, slipping to 2.0%, its weakest pace in two years.

Analysts attribute much of the deceleration to base effects following last year’s sharp price increases, suggesting that underlying demand‑driven inflation remains relatively stable.

For the Bank of Japan, the latest figures present a delicate policy challenge. While inflation is finally within the target range, underlying price pressures have not disappeared entirely.

Rate increases?

Some economists argue the BOJ may still lean toward gradual rate increases, particularly as wage negotiations progress and the government pushes for sustained real income growth.

Others caution that tightening too soon could risk undermining Japan’s still‑fragile consumption recovery.

What is clear is that Japan has entered a new phase of its inflation story — one defined less by imported cost shocks and more by the question of whether domestic demand can carry the momentum forward.

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UK inflation’s latest fall sharpens focus on Bank of England rate cuts

UK inflation at 3%

The UK’s inflation rate has dropped to 3%, its lowest level since March last year, renewing expectations that the Bank of England (BoE) may soon begin cutting interest rates.

The fall, recorded in January, marks a clear reversal from December’s unexpected uptick to 3.4% and reinforces the broader downward trend seen in late 2025.

Economists note that easing petrol, food, and airfare prices have been key contributors to the decline, helping inflation move closer to the government’s 2% target.

Bank of England easier decision

The BoE has held Bank Rate at 3.75% in recent meetings, emphasising the need for confidence that inflation will not only reach 2% but remain there sustainably.

However, with inflation now falling faster than previously forecast, policymakers appear to have greater room to consider loosening monetary policy later this spring.

The Bank itself has acknowledged that inflation is likely to return to target ‘a bit quicker than previously forecast’, suggesting scope for cuts if economic conditions evolve as expected.

Rate reduction likely in March or April 2026

Market analysts increasingly anticipate a rate reduction as early as March or April, particularly as wage growth cools and unemployment edges higher—factors that reduce domestic inflationary pressure.

For households and businesses, a cut would offer welcome relief after two years of elevated borrowing costs, potentially lowering mortgage rates and improving credit conditions.

While the BoE remains cautious, the latest inflation figures strengthen the case for a shift towards easing—signalling that the long, difficult climb down from the inflation peak may finally be nearing its conclusion.

As expected

Most economists and market analysts expected UK inflation to fall back to around 3% in the January release, down from 3.4% in December 2025.

UK inflation falls to 3%
UK inflation falls to 3%

This means the actual figure—3%—came in exactly in line with forecasts, rather than surprising to the downside or upside.

That alignment matters for the Bank of England because it reinforces the sense that inflation is easing broadly as expected, rather than stalling or re‑accelerating.

Employment data

Alongside falling inflation, the Bank of England is closely watching UK labour market data, which remains a key factor in its interest rate decisions.

Recent figures show wage growth is easing, with average earnings excluding bonuses rising at a slower pace—now below 6%—while job vacancies continue to decline.

This softening suggests that domestic inflationary pressure from pay settlements may be waning, giving the Bank more confidence that inflation can return to target sustainably.

However, unemployment remains low, and services inflation is still sticky, meaning policymakers are likely to weigh jobs data carefully before committing to rate cuts.

If wage growth continues to moderate and employment weakens further, the case for easing monetary policy will strengthen.

Office for National Statistics

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The U.S. Federal Reserve has cut interest rates by 0.25%, lowering the federal funds rate to a range of 3.75%–4.00%

U.S. interest rate cut October 2025

This marks the second consecutive cut in 2025 amid economic uncertainty and a government data blackout.

In a move aimed at supporting growth, the Federal Reserve reduced its benchmark interest rate by 0.25% following its October policy meeting.

The decision, reportedly backed by a 10–2 vote from the Federal Open Market Committee, reflects growing concern over a weakening labour market and subdued consumer confidence.

Chair Jerome Powell acknowledged the challenges posed by the ongoing U.S. government shutdown, which has delayed key economic reports.

With official data frozen, the Fed relied on private indicators showing a slowdown in hiring and modest inflation. The Consumer Price Index rose just 3% year-on-year, below the Fed’s long-term target.

While the rate cut aims to ease borrowing costs and stimulate investment, Powell cautioned against assuming further reductions in December.

He emphasised that future decisions would depend on incoming data and evolving risks. It is not a done deal.

The Fed also announced plans to end quantitative tightening (QT) by 1st December 2025, signalling a broader shift towards monetary easing.

Markets responded cautiously, with investors weighing the implications for growth, inflation, and the Fed’s credibility.

Markets, after a short rally during the week, were subdued after the announcement.

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