UK Economy Shifts Gears Amid Energy Prices Shock

The year in review for the UK economy played out in two distinct halves. From September 2025 to February 2026, the underlying disinflationary process continued, with activity becoming increasingly subdued and slack accumulating in the labour market. The temporary spike in headline inflation from a one-off tax and administered price changes began to subside, while wage growth and services price inflation moved closer to target-consistent rates.

However, this outlook changed significantly in March 2026 due to the conflict in the Gulf and disruption to global energy supplies. Higher oil and gas prices raised headline inflation through direct and indirect effects, forcing monetary policy to focus on potential second-round changes in wage and price-setting.

BANK OF ENGLAND EXTERNAL MPC MEMBER ALAN TAYLOR acknowledged that he was comfortable with current policy but remained aware of risks. He noted that the economy had changed significantly since 2022, with demand weaker, the labour market looser, and wage settlements already falling towards target-consistent rates.