Clare Lombardelli Warns on Inflation Risks at Warsaw Macroeconomic Policy Conference

WARSAW, 26 SEPTEMBER 2026 —

The Bank of England’s Monetary Policy Committee (MPC) has lifted its near‑term inflation forecast, now expecting consumer price inflation (CPI) to rise to about 4.2 % in the first quarter of 2027, up from the 3.7 % level projected in its July Report.

The change follows a sharp uptick in global energy prices driven by the conflict in the Middle East, which has pushed Brent crude oil and natural gas prices higher and widened refinery crack spreads.

The MPC’s latest forecast shows CPI climbing from the current 3.1 % to roughly 3.7 % by the end of 2026 and to 4.2 % in 2027 Q1. This is a material increase from the July projection, which had expected CPI to fall back to the 2 % target by summer 2026.

The revised outlook reflects the Bank’s assessment that the energy shock will continue to feed through to prices for months to come, with uncertainty about how long the conflict will last and how volatile energy prices will remain.

The Bank’s framework for assessing the energy shock’s impact on inflation identifies four channels. Direct effects arise from higher household energy costs; indirect effects come from firms’ production costs and supply‑chain pressures; demand effects stem from reduced real incomes and spending; and second‑round effects involve inflation expectations, wage setting and domestic price‑setting.

The Bank notes that direct effects have already lifted inflation broadly, while indirect pass‑through has been weaker and demand has remained more resilient than expected.

Brent crude oil prices have fluctuated between around $70 and well over $110 per barrel since the conflict began. In the weeks since the July Report, Brent has increased by 26 % to about $98 a barrel. Natural gas prices have risen by roughly 50 % in recent weeks.

Crack spreads – the difference between refined petroleum product prices and Brent – have risen well above pre‑conflict levels, amplifying petrol, diesel and jet fuel prices for UK consumers. For example, petrol prices rose from about 132 pence per litre in February to around 172 pence per litre by September.

Higher global energy prices have also pushed up motor fuel prices for UK households. The Ofgem energy price cap will rise by almost 4 % in October, taking an average annual household utility bill to £1,723. That figure is projected to climb further to over £2,000 in the first quarter of next year.

Measures announced in last year’s Budget, including a temporary cut to VAT on electricity until March 2027, are mitigating the direct effects of higher energy prices on inflation. Without these measures, the inflation projection for the first quarter would be even higher.

The Bank’s near‑term inflation forecast now points to CPI inflation rising from its current level of 3.1 % to around 3.7 % in 2026 Q4 and to around 4.2 % in 2027 Q1, materially higher than the projection in July. The Bank has not yet provided a detailed policy response, noting that decisions will depend on how the shock evolves, how it propagates through the UK economy and what that implies for medium‑term inflation.

The Bank’s speech highlights three main messages. First, the main driver of near‑term inflation is developments in global energy prices. The energy shock due to the conflict in the Middle East has already pushed up UK inflation, and the Bank expects it to continue to do so in the coming months. Second, the medium‑term outlook depends on how the energy shock propagates through the economy through indirect, demand and second‑round effects.

The key judgement for monetary policy is whether emerging evidence suggests inflation may become persistent. Third, given the uncertainty, policy decisions are necessarily made with incomplete information. As evidence emerges the Bank will learn about the shock, its transmission and the risks around these.

The Bank cannot offer firm guidance on the path of policy, but it can be transparent about the reaction function: this depends on how the shock evolves, how it propagates through the UK economy and what that implies for medium‑term inflation.

The Bank’s revised outlook underscores the importance of monitoring energy price movements and their transmission into the broader economy. While monetary policy cannot prevent the initial rise in inflation caused by higher energy prices, it can help ensure that temporary increases do not become persistent inflationary pressure.

The Bank’s emphasis on second‑round effects – where higher energy prices generate inflationary pressures across domestically set wages and prices – signals that prolonged high and volatile energy prices could raise the risk of entrenched inflation.

For investors and market participants, the key indicators to watch are the trajectory of Brent crude and natural gas prices, the level of refinery crack spreads, and the pace of wage growth in the UK. A sustained rise in energy prices could keep CPI above 4 % and increase the likelihood of further rate hikes. Elevated crack spreads may prolong fuel price volatility, delaying inflation easing.

Rising wage growth could signal second‑round inflation risks, prompting the Bank to intervene.

The Bank’s updated forecast does not yet indicate a specific policy move, but it signals that the MPC is closely watching the energy shock’s evolution. The Bank’s reaction will remain data‑dependent, with policy decisions hinging on how the shock propagates through the economy and what that implies for medium‑term inflation.

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