Iran battle incinerates inflation forecasts

The war in Iran has torched the Bank of England’s hopes of hitting its inflation target, as traders bet the next move in interest rates will be an increase to curb rising prices.

Brent crude has soared to as much as $120 a barrel – its highest level in almost four years – since the conflict erupted a fortnight ago.

Tehran’s shutting of the Strait of Hormuz has added to the biggest disruption ever in global oil supplies, too.

Petrol pump prices, air fares and mortgages have already jumped on the back of the energy shock, sparking fears of an inflation crisis and recession the longer Iran resists US and Israeli attacks.

In black and white: The spectre of inflation has forced its way back onto the agenda

Rate-setters on the Bank’s Monetary Policy Committee are expected to keep the cost of borrowing at 3.75 per cent this week. 

Before the conflict, it had hoped inflation would fall back to its 2 per cent target – mainly because the Government’s energy price cap shielding domestic users drops next month to £1,641 a year, saving about £10 a month for a typical dual-fuel household.

But the cap is set to jump to £1,827 from July, more than wiping out those gains.

Higher gas prices, which have almost doubled in the last month, will also have fed through by then, said Sanjay Raja of Deutsche Bank.