4 March 2026: The OBR expects 2% inflation target to be hit in late 2026

“My plan is the right one,” bellowed the Chancellor as she guided MPs through the Office for Budget Responsibility’s updated assessment of the UK’s economic prospects.

The OBR’s forecast showed inflation fading, interest rates falling further, and borrowing falling.

Higher-than-expected tax receipts, in part due to the strong recent performance of the stock market, enabled Rachel Reeves to pay for higher spending on special educational needs, fund policy U-turns on business rates and inheritance tax, and cut borrowing a smidgen.

The Chancellor said the OBR’s forecast showed that, by the time of the next election, the average person in the UK would be £1,000 a year better off, after accounting for inflation, than when Labour was elected.

“I know that the question people will ask themselves at the next general election is this: Are my family and I better off? I am determined that the answer will be yes,” she thundered.

The big issue is that the OBR’s forecast was completed before a single missile was fired at Iran and already looks out of date. Several headwinds can blow the economy off course. The rise in oil and gas prices seen this week will pervade almost every sector of the economy, meaning that by the time Reeves presents her budget at the end of October, the economy could look very different.

Economists warn that a prolonged conflict involving Iran could quickly render the projections outdated, dampening growth, pushing up inflation and increasing public debt.

Most strikingly, the price of Brent crude has jumped by more than 15% this week to above $80 a barrel.

Global gas prices, on which the UK remains heavily reliant, have nearly doubled. If sustained, such increases would feed through into higher energy bills for businesses and households, adding to inflationary pressures and constraining growth.

Reeves opened her speech by acknowledging that the world had become “yet more uncertain” in recent days following the decision by the United States and Israel to launch strikes on Iran, which resulted in the death of Supreme Leader Ayatollah Ali Khamenei and other senior figures.

The original forecast from the OBR was for inflation to fall to the Bank of England’s 2% target by this Autumn. Still, already analysts are predicting that the MPC meeting on March 19th will have to consider delaying the rate cut that had been pencilled in for that meeting.

As energy prices rose and stock markets tumbled, Sterling fell to a low of 1.3253 as risk aversion took hold. It rallied to close at 1.3361, but until there is a clear idea about how this war will end, it will remain on the back foot.

After spooking investors last year amid tariff turmoil, the dire combo of high inflation and weak economic growth is rearing its head again, with the Iran war as its latest driver.

Stagflation is often considered the worst-case scenario for the economy, as it's a more difficult problem for policymakers to solve than a typical economic slowdown. That's because the Central Bank would be restricted in its ability to cut rates, as it would in a normal recession. After all, it would risk stoking even more inflation.

Oil prices have been the latest input for inflation arguments this week, while worrying economic data last week has dimmed the outlook for economic growth this year.

The risks of stagflation are considerably higher. The spike in Treasury yields since conflict erupted in the Middle East over the weekend is a sign that investors are dumping government bonds in anticipation of a hotter inflationary environment and higher interest rates, which can weigh on economic growth.

The Fed has been consumed by fears of higher inflation and lower growth for a considerable time, but those fears have not been translated into a stagflationary picture; the effect on the market could easily push a fragile economy over the edge.

Kansas City Federal Reserve President Jeffrey Schmid signalled his continued opposition to further interest-rate cuts, saying the U.S. labour market is in balance and inflation ​is too hot.

"Inflation has been above the Fed’s objective for nearly five ‌years now," Schmid said in remarks prepared for delivery to the Metro Denver Executive Club, noting that demand is outpacing supply and is pushing up the price of services too fast to be ​consistent with a return to the Fed's 2% inflation goal. "I don’t think we ​have room to be complacent."

Schmid did not address the economic impact of the conflict in Iran in his remarks, though, at least in the short term, the volatile situation in the Middle East would seem to add to his concerns about price pressures.

Inflation is running near 3%, he noted, adding that a one percentage-point increase in inflation reduces U.S. household purchasing power by $300 billion.

Meanwhile, in a podcast broadcast yesterday, Neel Kashkari, the President of the Minneapolis Fed, sounded data-dependent and cautious. His emphasis on inflation risks and watching headline inflation carefully gives the comments a slight hawkish lean, which is similar to that of Jeffrey Schmid

At the most recent FOMC meeting on January 28, 2026, Kashkari voted with the majority to keep the federal funds rate unchanged at 3.50%–3.75%.

The decision was 10–2 in favour of holding rates steady, with two dissenters who preferred a 25-basis-point rate cut. This majority was slightly more hawkish than the market predicted.

The publication of the February employment data later this week may bring commentators back to the real world, if only briefly, with the economy predicted to have added 60k new jobs last month. This is less than half the number for January and will provide ammunition to those in both the FOMC and the Administration who are calling for rate cuts, notwithstanding events in the Middle East.

The Dollar index benefited from traders’ risk aversion as oil and gas prices rose rapidly and the situation in the Gulf escalated. Iran tried to hit U.S. bases the last time it was attacked, but has been targeting the oil infrastructure of its neighbours this week, which is a clear escalation of its offensive intentions.

The index rallied to a high of 99.68 as long-outstanding stop-loss orders were triggered. It eventually calmed down a little but still closed considerably higher at 99.06.

The ECB’s Chief Economist has said that a prolonged war in the Middle East and restricted oil and gas supplies from the region could cause a “substantial spike” in inflation and a “sharp drop in output” in the eurozone.

Speaking to the Financial Times, Philip Lane said that “directionally, a jump in energy prices puts upward pressure on inflation, especially in the near term”, and that such a development would be “negative” for growth.

The former Irish Central Bank Governor said the ECB said the magnitude of the shock would depend “on the breadth and duration of the conflict," adding that “the impact would be amplified if it also gave rise to a repricing of risk in financial markets”.

The ECB “will be closely monitoring developments”, Lane said.

Major sectors are affected and include energy and resources, tourism, media and entertainment, transportation and logistics, and aerospace and defence," he said.

"Global supply chains are also coming under significant strain. With the Straits of Hormuz effectively closed, vessels are diverting from the Red Sea, raising shipping times, freight costs, and insurance premiums across already stretched logistics networks.

"Some operators are now rerouting via the Cape of Good Hope, a detour that can add up to two weeks to transit times and reintroduce friction into Asia-Europe supply chains. The closure of airspace in the Middle East, even if temporary, will also further impact stretched supply chains."

Christine Lagarde pointed to the troubling state of stagnation that characterises the European economy. I have also repeatedly expressed my frustration over how little attention European policymakers and thought leaders pay to this problem, she commented in a speech yesterday.

When they do make an effort, as Mario Draghi did a few years ago, they fail both in analysing the problem and in providing a remedy.

Lagarde addressed Europe’s economic ailment in a speech in Washington. She was there to receive the Paul Volcker Lifetime Achievement Award at an annual conference with the U.S. National Association of Business Executives.

In her speech, Lagarde made a few remarkably blunt statements about the systemic problems facing Europe’s economy today, starting with the most apparent: Europe’s exceptional reliance on exports.

In terms of substance, this is a correct observation. However, Lagarde is way off on the longevity of this dependency. Most EU members have relied on exports to drive their economic growth since at least the 1970s. The expansion of global trade in the 1980s, 1990s, and 2000s only reinforced Europe as an export-dependent continent.

The Euro has plunged since the conflict began, yesterday falling to a low of 1.1530. If this continues, it will have an inflationary effect on the EU economy, as imports become more expensive while exports become cheaper. It rallied to close at 1.1617, but remains dangerously close to its medium-term support level at 1.1580. A close below that level will prompt traders to consider short positions, targeting 1.1470.

Have a great day!