British small and medium-sized enterprises are facing a fresh squeeze on margins after official figures revealed inflation jumped to 3.3 per cent in March, the first hard evidence of how the Middle East conflict is feeding through to the real economy.
Data released by the Office for National Statistics on Wednesday showed the Consumer Prices Index accelerated from 3 per cent in February, in line with City forecasts and marking the first uptick in the headline rate since December. It is also the first inflation reading to capture the surge in global oil and gas prices since hostilities erupted two months ago, with Brent crude up roughly 30 per cent and trading around the $100-a-barrel mark for several weeks.
The pain at the pump was unmistakable. Petrol rose by 8.6 pence per litre to an average of 140.2p, its highest since August 2024, while diesel, the lifeblood of the haulage and trades sector, leapt by 17.6p to 158.7p, a level not seen since November 2023. For the nation’s 5.5 million SMEs, many of whom rely on vans, lorries and company cars to service customers, it amounts to a significant and largely unhedgeable operating cost.
Air fares added further heat, climbing 10 per cent month-on-month against a 0.3 per cent fall over the same period a year earlier. That is the steepest February-to-March rise since 2016, although the ONS noted that prices were collected before the outbreak of war and were inflated by the timing of long-haul flights immediately after Easter.
Grant Fitzner, chief economist at the ONS, said: “Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years. Airfares were another upward driver this month, alongside rising food prices. The only significant offset came from clothing costs, where prices rose by less than this time last year.”
Economists at the International Monetary Fund and elsewhere have warned that the headline rate could climb through the summer and potentially peak above 5 per cent, more than double the Bank of England’s 2 per cent target. Core inflation, which strips out volatile food and energy components, edged down to 3.1 per cent from 3.2 per cent, but services inflation, the measure most closely watched by Threadneedle Street, ticked up to 4.5 per cent from 4.3 per cent. Food prices were 3.7 per cent higher year-on-year, a number that will ripple through hospitality margins.
The Bank of England’s monetary policy committee is expected to leave Bank Rate on hold at 3.75 per cent when it meets next Thursday, though rate-setters are facing an uncomfortable dilemma. Martin Beck, chief economist at WPI Strategy, said: “With inflation likely to remain above target for longer, the Bank of England is unlikely to cut rates any time soon. But equally, the case for further tightening remains weak. A prolonged period of policy on hold looks 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 further, arguing that the Bank “cannot risk appearing complacent, and we therefore expect one precautionary [quarter point] rate increase over the coming months”. A move of that kind would raise the cost of variable-rate borrowing for millions of homeowners and small business owners, and set back those attempting to step onto the property ladder.
There are, however, glimmers of resilience. GDP grew by a stronger-than-expected 0.5 per cent in February and unemployment fell unexpectedly to 4.9 per cent in the three months to February, down from 5.2 per cent, suggesting that, for now at least, the labour market is holding up despite the external shock.
Rachel Reeves, the chancellor, struck a sympathetic note: “This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down.” The Treasury has so far extended support to a limited number of rural households dependent on heating oil and has widened an existing scheme aimed at cutting energy bills for businesses, though SME lobby groups are already pressing for more targeted relief for firms whose fuel and logistics costs cannot easily be passed on to customers.
For British SMEs, the immediate message from March’s data is stark: energy-driven cost inflation is back, interest rate relief is further away than many had hoped, and the next phase of the Middle East conflict will do as much to shape the outlook for cash flow and investment as anything decided in Westminster.
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Inflation climbs to 3.3% as middle east conflict drives up fuel bills for Britain’s SMEs