A Sobering Time

ONS shopping basket includes alcohol-free beer, houmous and pet grooming.

The Office for National Statistics (ONS) has recently updated its shopping basket, which is used to measure UK inflation.

The ‘basket’ provides a fascinating insight into the changes in UK consumer tastes, trends and lifestyles. The 2026 basket reflects 760 goods and services and a further shift towards healthy living. Alcohol-free beer and houmous are among the latest items added. Together with pet grooming, to reflect care treatments for dogs beyond the services offered at vets.

Caravans were already in the basket, but motorhomes have now been added. Also included are dashcams reflecting the growing number of security products being used by drivers. Amongst the items removed are premium bottled lager bought in pubs and restaurants, along with sheets of wrapping paper, with consumers now buying rolls of wrapping paper instead.

Some of the changes also reflect the new method of data collection by the ONS. It will now use real-time supermarket scanner data for more than half of the grocery market information on a billion products sold each month. Scanned data will now be obtained from some 300 million price points compared to a manual process where prices were previously checked on 25,000 items in stores by ONS inspectors.

However, while the ONS is continually improving the quantity and quality of data used to measure inflation, unfortunately the actual rate of inflation can be heavily influenced by events outside the control of the UK. The conflict in the Gulf has pushed oil and gas prices much higher, which is expected to feed through into higher prices for UK consumers and higher inflation. The Bank of England had previously expected inflation to drop towards its 2% target by the end of 2026 and markets had anticipated at least two further interest rate cuts each of 0.25%.

However, markets are now pricing in that interest rates could now rise in 2026 if the conflict in the Gulf is prolonged. Housing and household services currently represent over 31% of the inflation basket and energy bills are forecast to jump by 20% in July. Transport is the third largest category, alongside restaurants and hotels at 11%, with both sectors energy dependent.

Little wonder the Bank of England is sounding more cautious!

For investors, the Gulf conflict will continue to overhang markets, but those businesses with pricing power that can pass on higher energy costs should be better placed to navigate current market volatility.

What have we been watching?

The US-Iran conflict remains a fast-moving situation. Key developments last week include Iran’s rejection of the US 15-point peace proposal, Trump citing positive ongoing talks with unnamed officials, and Iran-backed Houthi militants joining the conflict over the weekend. Trump subsequently openly floated the idea of a military operation to extract Iran’s uranium and whether the US could seize the Kharg Island export hub, raising fears of a new front in the war.

With many senior Iranian officials having gone underground and are avoiding all electronic communications to evade targeted assassinations (recall the Israeli pager attack). It is unclear whether any single diplomat in Tehran actually speaks for the Islamic Revolutionary Guard Corps – the people who control the weapons – so it is increasingly difficult to see how the conflict ends.

While back-channel negotiations are reportedly underway in Pakistan, progress remains opaque. Compounding this, Iran has reportedly insisted on negotiating exclusively through JD Vance, reflecting a deep distrust of the broader Trump administration.

In the absence of concrete confirmation from all parties, markets have largely stopped listening to Trump’s positive rhetoric. Previously, it wasn’t necessarily that markets believed Trump, but rather that they read it as a signal of him capitulating – reflecting increased likelihood of a “TACO” moment (Trump Always Chickens Out).

 

The S&P 500 is now down for five consecutive weeks for the first time since 2022, and with no clear end to the conflict in sight, investors remain fearful of a fresh escalation. As of Friday, the Nasdaq Composite entered correction territory, dropping by over 10% from its October 2026 record high.

Bond markets remain nervous but appear to be showing some signs of stability, with US 2-year and 10-year Treasuries flat on the week, yielding 3.9% and 4.4% respectively – pulling back from their 8-month highs on Friday. UK 2-year and 10-year gilts have shown similar behaviour, yielding 4.5% and 5.0%, respectively, meaningfully higher than what Rachel Reeves would have budgeted for. Overnight index swaps ahead of the next ECB meeting in April currently price a 47% chance of a cut – the first time in over a week it has fallen below 50%.

Read our latest investment insights from Alpha PM

 

Brent crude has opened at $115/barrel, up 15% on the week following the Houthi escalation over the weekend, while EU gas is slightly lower at -2.5% to €55.50/MWh.

Shell’s CEO has warned that Europe could face fuel shortages as soon as April, with supply issues already emerging in parts of Asia.

Finally, only in the UK! We have previously observed the UK’s embarrassing track record when it comes to infrastructure projects relative to other countries. HS2 is a prime example. The latest news is that HS2 high-speed trains could be made to run slower than initially planned to keep costs down. Why build it then? You couldn’t make it up if you tried!

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