UK markets declined this week, with the FTSE 100 Index falling 1.93% to trade at 10,380 points at the time of writing.
UK inflation accelerated to 3.3% in March, led by a surge in petrol prices in one of the starkest signs so far of the hit to the economy from the Iran war. The figure from the Office for National Statistics represented a sharp increase from February’s 3% and matched the forecasts of analysts polled by Reuters.
Higher petrol prices drove the biggest rise in transportation costs since 2022, the Office for National Statistics said. Rising food costs also helped push inflation higher. The numbers expose the challenge facing rate-setters at the Bank of England, who will meet next week to consider how to respond to the energy shock triggered by the closure of the Strait of Hormuz and strikes on Gulf infrastructure.
Before the US and Israeli attacks on February 28th, the Bank of England’s Monetary Policy Committee was preparing to lower interest rates from the current level of 3.75% and had forecast inflation would ease to 2.1% in the second quarter. The economic effects of the conflict have since radically changed the picture, with the Bank of England saying last month that inflation could touch 3.5% in the third quarter if the energy shock is prolonged.
Investors are currently expecting at least one interest rate rise this year, although they are putting low odds on a move next week. Core inflation, which excludes energy, food, alcohol and tobacco, was 3.1%, slightly below economists’ forecasts and February’s reading. Services inflation, a key gauge of price pressures for the Monetary Policy Committee, rose to 4.5% in March from 4.3% in February.
Bank of England Governor Andrew Bailey has signalled he anticipates that a weak labour market will reduce the threat of a surge in energy costs fuelling a wage-price spiral. Growth in pay was slowing on the eve of the war, according to official figures published on Tuesday. Average weekly wages were 3.6% higher in the three months to February from a year earlier, down from 3.8% in the period to January.
The Monetary Policy Committee’s dilemma in the coming months is whether it should look through what may only be a temporary rise in inflation, or whether it will need to tighten policy to tackle second-round effects. The latest inflation figures also extend a trend of UK inflation outpacing that in the Eurozone, which was 2.6% in March.
UK consumer confidence fell to the lowest level since late 2023 in April, according to the GfK consumer confidence index, as higher inflation following the war in the Middle East caused worries among households, darkening the outlook for spending and economic growth. Expectations of higher inflation have put pressure on mortgage rates as financial markets price in that the Bank of England will raise interest rates this year. The average two-year fixed mortgage rate was 5.82% on Thursday, a rate that has stabilised over the past few weeks but is up from 4.83% at the start of March, according to Moneyfacts.
Elsewhere, UK business activity grew more than expected in April, as surging costs and shortages triggered by the Iran war hurried companies into making purchases. The S&P Global Flash UK Purchasing Managers’ composite output index, a measure of activity in the manufacturing and services sectors, climbed to 52 in April, from 50.3 in March. Thursday’s reading was above the 50 mark, indicating a majority of businesses surveyed had reported a rise in activity during the month. Economists polled by Reuters had expected the index to decline to 49.9.
Commodity markets
In the commodity markets, Brent crude futures traded around $107 per barrel on Friday and are set for a weekly rise, as the US and Iran maintained restrictions on the flow of trade through the Strait of Hormuz. While US President Donald Trump has extended a ceasefire between the countries following a request by Pakistani mediators, Iran and the US are still restricting the transit of ships through the Strait of Hormuz.
Iran seized two ships in the Strait on Wednesday, tightening its grip on the strategic waterway. President Trump has also maintained a US Navy blockade of Iran’s trade by sea, and Iranian parliament speaker and top negotiator, Mohammad Baqer Qalibaf said a full ceasefire only made sense if the blockade was lifted. With his extension of the ceasefire on Tuesday, President Trump again pulled back at the last moment from warnings to bomb Iran’s power plants and bridges. Trump has not set an end date for the extended ceasefire.
Oil prices rose further towards the end of the week even as Israel and Lebanon agreed to prolong their truce following a meeting at the White House with senior US officials. The ceasefire, initially set to last 10 days, will now give more time for diplomatic relations, with Washington also pledging support to bolster Lebanon’s defences against Hezbollah.
Total exports of crude oil and petroleum products from the United States climbed by 137,000 barrels per day to a record 12.88 million barrels per day as Asian and European countries bought up supplies after disruptions tied to the Iran war.
Gold prices traded around $4,680 an ounce on Friday and are on track for a weekly fall, pressured by a stronger dollar and elevated oil prices that stoked inflation worries, as investors assess the conflict direction from stalled US-Iran talks.
Equity markets
US equity futures were mixed on Friday, as investors assessed the latest developments in the Middle East and analysed corporate earnings.
In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.36%, the S&P 500 lost 0.41%, whilst the Nasdaq Composite declined 0.89%. President Trump said in a social media post on Thursday that he had ordered the US Navy to “Shoot and kill” vessels laying mines in the Strait of Hormuz. The strategic waterway remains effectively closed, with both sides maintaining their blockades, pushing energy prices higher and reinforcing inflationary pressures.
The Federal Reserve is widely expected to keep US interest rates unchanged next week and for most of the year as policymakers evaluate the economic impact of the Iran conflict on inflation and growth. Investors also focused on remarks from Federal Reserve nominee chair Kevin Warsh earlier this week, in which he stressed the importance of central bank independence in monetary policy decisions.
In a confident performance before the Senate banking committee on Tuesday, Warsh denied that President Trump had asked him to reduce interest rates during the interview process. Warsh’s tense confirmation hearing came amid heightened concerns over the Federal Reserve’s independence, triggered by Trump’s frequent calls for the central bank to slash US borrowing costs.
Elsewhere, US business activity rebounded in April, with the S&P flash US Composite Purchasing Managers Index increasing to 52 in April 2026, the highest in three months, from 50.3 in March. Manufacturing output recorded the strongest gains in four years, while services expansion remained subdued.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.