UK inflation held at 3% in the year to February, before the start of the conflict in the Middle East, which has sent energy costs soaring and led to concerns of a resurgence in pricing pressures.

The latest consumer price index (CPI) reading from the Office for National Statistics (ONS), released on Wednesday, was in line with consensus expectations. This came after inflation fell to 3% in January from 3.4% in December.

The ONS said that clothing made the largest upward contribution to the monthly change in inflation in February, while motor fuels was the biggest downward contributor.

Read more: Multiple Bank of England interest rate rises expected after energy price surge

The data covered the period before the start of the conflict between the US, Israel and Iran on 28 February. The conflict has disrupted oil (BZ=F, CL=F) and gas (NG=F) supply, sending prices soaring, with concerns that a prolonged energy price shock could push inflation back up.

Grant Fitzner, chief economist at the ONS, said: “The largest upwards driver was the price of clothing, which rose this month but fell a year ago.”

“This was offset by falls in petrol costs, with prices collected before the start of the conflict in the Middle East and subsequent rise in crude oil prices.”

The Bank of England (BoE) warned last week that inflation will be higher in the “near term” due to the shock from higher energy prices, as it announced it had kept interest rates on hold at 3.75%.

Commenting on February’s inflation figures, chancellor Rachel Reeves said: “In an uncertain world we have the right economic plan, taking a responsive and responsible approach to supporting working people in the national interest.”

“We’re taking £150 off energy bills and providing targeted support for those facing higher heating oil costs. We’re also acting to protect people from unfair price rises if they occur, bring down food prices at the till, and cut red tape to boost long-term energy security — building a stronger, more secure economy.”

Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The economy entered the energy price shock caused by the conflict in the Middle East with CPI inflation stuck at 3.0%.”

“And based on our current working assumptions about oil and gas prices, we now think CPI inflation could rise to a peak of about 4.6% in Q4.”

“With the energy price shock likely to extinguish growth and add to the already elevated unemployment rate, in our baseline scenario we still think an extended interest rate pause is more likely than interest rate hikes,” she said.

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In fact, high inflation triggered mass protests in December and January, prompting the regime to massacre tens of thousands of its own citizens. President Donald Trump warned Tehran against further violence and began a military build-up that led to the current conflict.

Inflation has worsened and apparently is so bad now the government issued its largest-ever currency denomination: the 10 million rial note (equivalent to about $7).

The new currency went into circulation last week, according to the Financial Times, and comes just a month after the prior record holder, the 5 million rial, came out.

As prices continue to spiral higher while the war boosts demand for cash, long lines formed to withdraw the fresh banknotes, and supplies quickly ran out.

Iran’s central bank said electronic payments are still the main methods for transactions, though the 10 million rial bill will “ensure public access to cash,” the FT reported.

But doubts about the viability of electronic payments have grown during the war as the U.S. and Israel target the regime’s levers of control.

In addition to bombing Islamic Revolutionary Guard Corps and Basij paramilitary forces, a data center for Bank Sepah was also hit on March 11. Sepah is the country’s largest bank and is responsible for paying salaries to the military and IRGC.

“Iran is already in the middle of a severe cash liquidity crisis,” Miad Maleki, a senior advisor at the Foundation for Defense of Democracies and a former Treasury Department official, said on X earlier this month. “As of Jan 2026, banks were running out of physical banknotes daily, with informal withdrawal caps of just $18–$30/day. Cash in circulation surged 49% YoY due to panic hoarding. The regime simply cannot pivot to cash payments, there isn’t enough physical currency in the system.”

Meanwhile, a currency collapse that began after last year’s U.S.-Israeli bombardment has fueled crippling inflation. The rial lost 60% of its value in the months after the 12-day war, and food inflation soared to 64% by October. It accelerated further to 105% by February, vaulting overall inflation to 47.5%.

The exchange rate fell as low as 1.66 million rials per $1 last month, though it strengthened to about 1.5 million rials as the U.S. temporarily lifted sanctions on Iranian oil.

Heightened demand for cash further stresses a financial system that was considered dubious even before the current war started three weeks ago.

The failure of Ayandeh Bank late last year forced the regime to fold it into a state-run lender, underscoring how fragile the sector was as bad loans piled up to politically connected cronies.

“This was largely theater. In reality, Iran’s entire banking system is insolvent, its balance sheets sustained by fiction rather than assets,” Siamak Namazi, who was a U.S. hostage in Iran from 2015 to 2023, wrote in a report for the Middle East Institute in January.

During his captivity, he learned from imprisoned former officials and business elites that politically connected borrowers bribed assessors to inflate the value of properties, which were used to obtain massive loans.

Instead of repaying the loans, borrowers just gave their properties to the bank, which sold them to other banks at a paper profit, according to Namazi. Those banks knew the properties were overvalued “garbage,” but played along in the scheme by dumping their own toxic assets in exchange and booking fictitious gains.

“The result is a closed-loop Ponzi scheme, sustained by mutual deception and regulatory complicity,” he added. “This practice has metastasized over the past 15 years and is far more extensive than this simplified description suggests. And this is only the banking system. Much of the rest of Iran’s economy is afflicted by similarly entrenched corruption and mismanagement.”