UK Inflation Could Peak Around 3.5-4.0%

The Pound Sterling remains vulnerable against the euro as rising oil prices push UK inflation expectations higher, with markets bracing for a potential peak near 3.5–4.0% later this year.

Inflation has re-emerged as a key concern for both markets and central banks.

How high it ultimately rises will depend on the duration of the Iran war and how long oil prices remain elevated.

However, while risks are clearly building, the current environment differs significantly from past oil shocks.

At current energy prices, analysts expect UK inflation to peak in the region of 3.5–4.0% later this year.

Oil remains the main driver.

Higher energy costs are feeding through into goods and services, lifting price pressures across the economy.

This has prompted central banks to adopt a more hawkish tone, with the Bank of England and the European Central Bank both signalling a readiness to tighten policy if needed.

That said, the outlook is not uniformly negative.

Any de-escalation in the conflict or reopening of the Strait of Hormuz could ease oil prices and limit the inflation spike.

Even so, structural damage to energy infrastructure suggests prices may remain elevated compared to pre-war levels.

This is Not the 1970s

Comparisons with the 1970s oil shock are understandable but likely overstated.

While oil prices have surged, the modern global economy is far less dependent on energy than it was five decades ago.

The amount of oil required to generate economic output has fallen sharply, reducing the overall impact of price spikes.

In addition, today’s economies are more service-driven and less reliant on heavy industry.

Monetary policy frameworks have also evolved significantly.

Central banks now operate with clear inflation targets and greater independence, allowing them to respond more quickly to emerging risks.

This helps anchor inflation expectations and reduces the likelihood of a prolonged inflationary spiral.

Crucially, labour markets are more flexible than in the past.

The widespread wage indexation seen in the 1970s—which helped fuel a persistent wage-price spiral—is far less prevalent today.

While households will feel the squeeze from higher energy costs, the feedback loop into wages and broader inflation is weaker.

As a result, the risk of double-digit inflation remains low.

BoE Outlook and Sterling

Current forecasts suggest UK inflation could peak between 3.5% and 4.0% in the autumn.

This represents an increase of roughly one percentage point compared to pre-war expectations, but not a dramatic shift in the broader outlook.

As ING noted:

“At current energy prices, UK inflation is set to peak between 3.5–4% this autumn. That’s around a percentage-point higher than we’d expected pre-war, not exactly a game-changer for a central bank that was on the verge of cutting rates this month.”

This implies the Bank of England is more likely to pause rather than aggressively hike rates.

While further tightening cannot be ruled out if oil prices rise further, the base case remains one of caution.

For Sterling, this creates a mixed outlook.

Rising inflation may offer some short-term support, but if the Bank opts to hold rather than hike, the pound could weaken—particularly against the euro.

In that scenario, EUR/GBP may drift back toward the 0.87 level.