The UK has been placed on alert for a potential second wave of inflation following the Bank of England’s decision to hold rates at 3.75% on Thursday and warn that the Iran war’s energy price impact could push inflation above 3% and require rate hikes. The monetary policy committee described the conflict as a significant new shock that had the potential to generate a secondary inflation episode even as the first — driven by post-pandemic supply chain disruptions and the 2022 energy crisis — had been gradually brought under control. Officials warned that the second wave risk could keep price growth elevated throughout 2026.
The second wave framing reflects the Bank’s concern that the disinflationary progress of the previous year could be reversed by the new shock. The first inflation wave had required an aggressive tightening cycle that pushed rates to multi-year highs and imposed significant financial costs on UK households through higher mortgage rates and reduced real wages. A second wave, even if less severe, would arrive at a time when those costs had not yet been fully healed, making its impact particularly painful.
Governor Andrew Bailey said the Bank was determined to prevent a second wave from becoming entrenched in the way the first had been. He warned of the early evidence of renewed energy price pressure at UK petrol stations and said the Bank stood ready to act if the situation deteriorated. His determination to avoid a repeat of the first wave’s extended period of above-target inflation was evident in both his tone and the substance of his warnings.
Financial markets priced in the second wave alert with characteristic efficiency. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders adjusted their expectations for UK monetary policy. Analysts noted that the second wave risk justified a more pre-emptive monetary response than the Bank was currently signalling.
For UK households already bearing the financial scars of the first inflation wave, the alert for a potential second episode is deeply unwelcome. The prospect of renewed cost-of-living pressure before the damage from the first wave has been repaired represents a compounding financial challenge that will test both household resilience and the government’s ability to provide adequate support.