As the conflict between the United States, Israel, and Iran escalates, its ramifications are being felt across various sectors of the UK economy. From soaring fuel prices to shifting mortgage rates, the financial landscape is rapidly changing. The duration and intensification of hostilities will determine the extent and permanence of these economic shifts. Here, we explore the key areas that are likely to be affected.
Rising Fuel Prices: A Burden for Motorists
Motorists in the UK are currently grappling with rising petrol costs, which have surged to an 18-month peak. As of Friday, average petrol prices reached 140.6p per litre, a notable increase of nearly 8p since the onset of the conflict, while diesel prices climbed by approximately 17p to 159.2p, according to the RAC. This spike has ignited tensions between petrol retailers and the government, as retailers accused officials of using “inflammatory language” regarding potential profiteering from the oil price surge.
Analysts indicate that each $10 increase in oil prices can result in a 7p rise at the pump. Given the volatility of crude oil prices, which fluctuate in response to developments in the conflict, forecasts suggest that petrol prices could reach an average of 150p per litre if elevated oil prices persist. While motoring organisations maintain that supply levels remain adequate, they urge consumers to limit unnecessary journeys and adapt their driving habits to conserve fuel.
Additionally, the ripple effect of increased transportation costs can lead to higher prices for goods and services, particularly food. If supermarkets face rising transport expenses, this will inevitably be reflected in the cost of everyday items.
Mortgage Rates on the Rise
Before the conflict erupted, there was cautious optimism regarding a decline in fixed mortgage rates. However, the current climate has reversed this trend. Major lenders have increased mortgage rates in response to rising funding costs and the expectation that the base interest rate will remain elevated.
As of Friday, the average rate for a two-year fixed mortgage climbed to 5.10%, up from 4.84% just a month prior, marking the highest level since July. Similarly, five-year fixed rates surged from 4.96% to 5.19%. During periods of economic instability, lenders often withdraw products from the market, limiting consumer options. Over 500 residential mortgage offerings have been removed, although there still remain 7,147 deals available.
Adam French, head of consumer finance at Moneyfacts, noted that such withdrawals typically signal that funding costs are escalating too rapidly for incremental adjustments to remain viable. This tightening of mortgage options reflects the broader uncertainties in the financial landscape.
Energy Bills: Challenges Ahead
In the realm of energy, households are shielded to some extent by the price cap set by Ofgem, which governs gas and electricity prices in England, Wales, and Scotland. However, this cap is time-limited and does not benefit all consumers. With wholesale energy prices fluctuating, the situation in the energy market could dictate price changes for millions of households starting this summer.
A sustained surge in wholesale costs could lead to a significant rise in energy bills, reminiscent of previous spikes following the pandemic and the war in Ukraine. Energy Secretary Ed Miliband has indicated a willingness to intervene if necessary, but any potential measures will hinge on the conflict’s overall impact.
For those reliant on heating oil, the situation is even more precarious. Prices have reportedly more than doubled since the conflict began, with panic buying exacerbating supply issues. Emma Simpson, chief executive of Rural Action Derbyshire, emphasised that individuals low on heating oil cannot afford to wait for prices to stabilise. The government has announced plans to provide support for households struggling with rising heating oil costs, with further details expected soon.
Inflation and Interest Rates: A Complex Outlook
At the start of March, UK inflation was projected to hover around the Bank of England’s target of 2% over the coming years. However, the commencement of military action has cast doubt on these predictions. Analysts now face heightened challenges in estimating inflation rates amid this volatile environment.
While it is unlikely that inflation will reach the alarming peak of 11.1% witnessed in October 2022, the current circumstances complicate economic forecasts. The Bank of England, tasked with maintaining price stability, may find itself unable to lower interest rates as previously anticipated, thereby making borrowing more expensive. Conversely, savings accounts may yield slightly better returns as consumers tend to save more in times of uncertainty, although rising living costs could diminish the purchasing power of those savings.
Wider Economic Implications
Beyond fuel and housing, the broader economic implications of the conflict are substantial. The choice of holiday destinations may become limited as travel costs rise, particularly with jet fuel prices spiking. Airlines, although employing hedging strategies to mitigate the impact of rising fuel costs, may ultimately be compelled to pass these costs onto consumers through higher ticket prices.
Why it Matters
The unfolding situation in Iran could herald a period of increased financial strain for UK households. With rising fuel and energy costs, escalating mortgage rates, and a complex inflationary landscape, the conflict underscores the vulnerability of economies in a globalised world. The extent of these impacts hinges on the conflict’s duration and intensity, making it imperative for consumers and policymakers alike to remain vigilant and prepared for ongoing economic fluctuations.