Energy Shock Drives UK Inflation Expectations Higher
Persistent energy shock and rising inflation concerns have shifted the UK's economic outlook, according to Deloitte's Chief Economist in the UK. The ongoing conflict in Iran has led to a prolonged disruption of oil flows through the Strait of Hormuz, resulting in Brent crude oil prices exceeding $100 per barrel.
The International Energy Agency has pushed back its expectations for normalization in energy trade through the Persian Gulf to 2027, and current futures pricing suggests crude oil prices could average around $90 per barrel in spring 2027, a 14% uplift in expectations since August. Beyond oil prices, refining capacity impairments in the Middle East and Russia are also driving up refined petroleum product prices.
The overall impact of these developments is an upward revision in inflation expectations, with UK inflation expected to peak at about 4% in the first quarter of 2027 and remain around 3% well into autumn. Despite limited spillovers from higher energy prices into broader price pressures, persistently higher energy costs risk entrenching price pressures.