The energy price shock resulting from the Iran war has left households bracing for a pick-up in inflation. Even following the announcement of a ceasefire to hostilities, prices for both oil [1] and European natural gas [2] are still significantly higher than pre-war levels.
Recent events are causing flashbacks to 2022, when Russia’s illegal invasion of Ukraine in February of that year ushered in a sustained upswing in prices which saw inflation in the UK peak at 11.1% in October [3]. The ultimate impact on UK inflation will depend on how long disruptions to the supply of oil, gas, and other commodities - stemming from reduced traffic through the Strait of Hormuz and damage to infrastructure - persist.
These issues are highly uncertain, and the full scale of the energy price shock remains unclear. However, what we do know is that the current macroeconomic backdrop differs markedly from that of 2022.
As such, there are good reasons to believe that a wage-price spiral, of the kind that drove steep interest rate rises and sharp falls in financial markets four years ago, is less likely to materialise this time around.
A softer labour market
Central bankers charged with keeping inflation in check cannot do much about a supply shock that lifts energy prices. The standard playbook is for policymakers to look through such ‘one-off’ price hikes and focus instead on whether they generate so-called ‘second-round’ effects, such as firms passing higher costs on to consumers and workers demanding increased wages to offset the loss of purchasing power.
It is these dynamics that risk triggering a wage-price spiral, leading to a more persistent rise in inflation and ultimately requiring a monetary policy response. With the UK labour market markedly weaker now than in 2022, the risk of a wage-price spiral looks considerably lower than four years ago.
At the beginning of 2022, the UK unemployment rate stood at 4.2% [4] and job vacancies totalled 1.27 million [5]. Back then, the labour market was tight for several reasons.
The pandemic had resulted in many older workers retiring early, and there had also been an increase in the share of the working-age population who had a work-limiting long-term health condition. Many foreign workers had returned home during pandemic lockdowns and were unable or unwilling to return later, partly as a result of Brexit.
Fast forward four years and the labour market looks much weaker: the unemployment rate currently stands at 5.2% and job vacancies have fallen to 721,000. This has been the result of weak economic growth, subdued labour demand resulting from increases in employer National Insurance and the National Living Wage, and a decline in the inactivity rate, as more people have returned to the labour force.
As a result of these factors, private sector regular wage growth has been slowing in recent months, with latest data showing growth of 3.3%, compared with 4.5% four years ago [6]. In 2022, workers were well placed to demand higher wages to compensate for an increase in energy prices.
This is not the case today. Indeed, concerns over the impact of artificial intelligence (AI) on jobs might add to worker insecurity, resulting in more muted wage demands. Early evidence appears to support the notion that wage growth could cool going forward.
The Bank of England’s Decision Maker Panel (DMP) survey for March showed that firms' expected year-ahead wage growth fell to 3.4%, the lowest since the series started in 2022 [7].
Weaker corporate pricing power
It is also fair to say that corporate pricing power - i.e. the ability of companies to pass cost increases on to consumers - is currently lower than it was four years ago. In 2022, the UK economy was growing strongly as activity bounced back from the pandemic.
Household spending was strong in part due to pent-up demand, which was fuelled in part by excess savings that had been accumulated during Covid lockdowns. Households were willing and able to spend freely, and because consumers were flush with cash, they were less sensitive to price hikes. In turn, this enabled companies to pass on cost increases to the consumer, fuelling the inflationary cycle.
At the current juncture, household spending is much weaker. In the last quarter of 2025 it rose just 0.4% (quarter on quarter) compared to a gain of 3.2% in the first quarter of 2022 [8]. The high cost of living in recent years has eaten into savings, and nervousness over a deteriorating jobs market could make consumers less accepting of price increases.
Faced with more discerning consumers, firms could find it more difficult to pass on price increases, making second-round inflation effects less likely.
Supply chains in better shape
In 2022, the scarcity of many goods resulting from widespread, global supply chain disruption also contributed to inflation. Back then, global supply chains faced severe, persistent disruptions driven by the Russia-Ukraine war, the lingering effect of pandemic lockdowns, and labour shortages.
Sure enough, the recent effective closure of the Strait of Hormuz has restricted the supply of oil, gas and a range of other commodities (including fertiliser, aluminium and helium). However, the disruptive effect has so far not been nearly as broad or as severe as it was during the years following the pandemic.
The New York Fed’s Global Supply Chain Pressure Index (GSCPI, an index which integrates transportation cost data and manufacturing indicators to provide a gauge of global supply chain conditions) rose to a 3-year high of 0.68 in March [9]. However, this is well below the 4.49 peak of December 2021.
The cost of transporting a shipping container from China to Europe currently stands at around US$2,308 compared with over US$12,500 at the start of 2022 [10]. In short, supply-side pressures are currently exerting a weaker and narrower inflationary impulse than they did four years ago.
Monetary policy is more restrictive
A key reason why growth is weaker and the risk of a sustained period of inflation is less likely in 2026 is that monetary policy is tighter. The Bank of England’s (BoE) official interest rate stood at just 0.5% prior to Russia’s invasion of Ukraine in February 2022.
In contrast, the BoE’s Bank Rate currently stands at 3.75% [11]. The current level of interest rates is seen by policymakers as restrictive, meaning that it is serving to cool activity in the economy and therefore dampen inflationary pressures. This compares with the highly expansionary monetary policy at the start of 2022, which would have served to stimulate economic activity and raise inflation pressures.
2022 Revisited?
Rising energy and commodity prices, driven by the conflict in the Middle East, will certainly push up the price level in the UK during the coming months, especially when the energy price cap is adjusted in July to reflect higher wholesale gas prices. The scale of any increase in consumer prices remains uncertain and will depend on the duration and severity of supply disruptions, whether from a prolonged closure of the Strait of Hormuz or damage to key infrastructure.
The impact will be felt across the economy: households will see their real incomes squeezed, while firms are likely to face pressure on profit margins. Obviously, making accurate economic forecasts at the current juncture is even more difficult than normal.
That said, the OECD (Organisation for Economic Co-operation and Development) has recently revised its projections, raising its 2026 UK inflation forecast to 4.0% (from 2.5%) while lowering its GDP (Gross Domestic Product) growth estimate to 0.7% (from 1.2%) [12]. At present, none of the major economic forecasters expect a return to the double-digit inflation seen in 2022 [13].
The ‘stagflationary’ impact of rising energy prices will pose a dilemma for the BoE. With inflation already at 3% in February [14] (i.e. above the BoE’s 2% target), the outlook is likely to divide opinion within the BoE’s Monetary Policy Committee (MPC).
However, BoE Governor Andrew Bailey has sounded relatively dovish, stating on 1st April that markets were ‘getting ahead of themselves’ in pricing in interest rate hikes [15]. Having previously priced in as much as 100 basis points (bps) of rate hikes by end-2026 from the current 3.75% level, futures markets now imply closer to 50 bps of increases [16].
The scale of UK rate hikes currently priced in by markets is far smaller than the 340bps of tightening delivered in 2022 [17], and given the weakness of the real economy, the bar for further monetary tightening remains somewhat high. Importantly for investors, similar arguments can be made regarding the outlook for interest rates in the US, which have an outsized impact on trends in global financial markets.
Futures markets currently expect the US Federal Reserve (the Fed, the US central bank) to keep its policy rate broadly unchanged over the next 12 months [18]. In turn, it would appear that current interest rate trends are much less likely to deliver the shock to financial markets that occurred in 2022, when emergency monetary tightening contributed to sharp falls in bond and equity markets alike.
To be sure, events in the Middle East are likely to keep financial markets volatile until there is greater confidence that conditions are returning to some semblance of normality. There is also a clear risk that a “stagflationary” economic backdrop will prompt downward revisions to corporate profit expectations, although it is worth noting that global earnings forecasts have so far continued to be revised higher despite events in the Middle East [19].
However, as it stands, a sustained inflation shock that produces sharp rises in interest rates and a dramatic repricing in bond and equity markets looks considerably less likely than it did in 2022.
17 April 2026
[1] https://tradingeconomics.com/commodity/brent-crude-oil
[2] https://tradingeconomics.com/commodity/eu-natural-gas
[3] https://tradingeconomics.com/united-kingdom/inflation-cpi
[4] https://tradingeconomics.com/united-kingdom/unemployment-rate
[5] https://tradingeconomics.com/united-kingdom/job-vacancies
[8] https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kgy8/ukea
[9] https://www.newyorkfed.org/research/policy/gscpi#/interactive
[11] https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
[12] https://www.bbc.co.uk/news/articles/cgk0j71g417o
[13] https://assets.publishing.service.gov.uk/media/69b98a3cf6acd3f43e9612d6/forecomp_March.pdf
[14] https://tradingeconomics.com/united-kingdom/inflation-cpi
[16] https://www.barchart.com/futures/quotes/J8Z26/interactive-chart
[17] https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
[18] https://www.yardeni.com/charts/global-financial-markets/interest-rates-stocks/federal-funds-rate
[19] https://www.yardeni.com/charts/search?q=earnings+msci+acwi