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The ongoing conflict involving Iran is beginning to reverberate through the UK economy, impacting everything from fuel prices to mortgage rates. As tensions escalate, the ramifications for consumers and businesses alike could deepen, depending on the duration of the hostilities and the resilience of supply chains. Here, we delve into the key areas that may be affected and the broader economic implications.
Rising Fuel Prices: A Direct Hit on Motorists
Motorists across the UK are already feeling the sting of rising fuel costs. As of last Friday, average petrol prices surged to 150.11p per litre, representing an increase of 17.3p since the onset of the conflict. Diesel prices have also followed suit, rising by 35.3p to reach 177.68p, as reported by the RAC. This spike has ignited a heated debate between fuel retailers and the government, with accusations of price gouging being levied against the industry amid soaring oil prices.
Industry analysts suggest that for every $10 increase in crude oil prices, pump prices are likely to climb by approximately 7p per litre. Since the conflict began, crude oil prices have exhibited significant volatility, fluctuating in response to developments in the region and statements from the White House. While motoring organisations claim that fuel supplies remain stable, they urge drivers to reconsider non-essential journeys and adopt more fuel-efficient driving habits.
The ramifications of rising petrol prices extend beyond the forecourt; they can lead to increased costs for goods and services. Higher transportation expenses for supermarkets, for instance, may ultimately translate into elevated food prices for consumers.
Mortgage Rates: A Shift in Consumer Landscape
Before the outbreak of hostilities, the mortgage market was poised for a period of declining interest rates. However, the current climate has prompted lenders to quickly raise rates, driven by escalating funding costs and a belief that the base borrowing rate will not decrease as previously anticipated. The average two-year fixed mortgage rate has surged from 4.83% in early March to 5.75%—the highest level since March 2023. Similarly, the average five-year fixed rate has climbed from 4.95% to 5.69%.
During times of economic uncertainty, lenders often withdraw mortgage products from the market, reducing consumer choice. Data from Moneyfacts indicates a reduction of 1,620 residential mortgage products, although over 6,000 options still remain accessible. Adam French, head of consumer finance at Moneyfacts, explains that when lenders withdraw products rather than simply adjusting prices, it typically signals that funding costs have escalated too rapidly for incremental adjustments to suffice.
Energy Bills: The Uncertain Future of Household Expenses
While households in England, Wales, and Scotland benefit from a price cap set by energy regulator Ofgem, this cap is time-limited and does not encompass all consumers. Currently, the maximum charge for those on variable deals is secured until July, with anticipated price reductions in April. However, the trajectory of wholesale energy costs in the coming months will be pivotal in determining household bills for the summer.
Cornwall Insight, an energy consultancy, forecasts that a dual-fuel household using a typical amount of gas and electricity could see annual bills rise to £1,934 from the current cap of £1,641. This forecast remains speculative, with potential for significant fluctuations based on the evolving geopolitical landscape. In the past, sharp rises in energy prices necessitated government intervention, such as the Energy Price Guarantee (EPG). The Chancellor has indicated that targeted support may be introduced for vulnerable households if necessary.
For those reliant on heating oil, predominantly in rural areas and Northern Ireland, the absence of a price cap presents a particularly pressing concern. With costs soaring, Prime Minister Sir Keir Starmer has announced a £53 million support package aimed at the most vulnerable users of heating oil, to be distributed through devolved authorities.
Inflation and Interest Rates: Navigating Economic Uncertainty
At the beginning of March, the UK’s inflation rate was projected to align closely with the Bank of England’s target of 2%. However, the recent escalation in conflict has altered this outlook. Analysts now anticipate a rise in inflation, complicating projections in light of the unpredictable military and economic situation. While it is unlikely that inflation will reach the peak of 11.1% observed in October 2022, the current conflict could still exert upward pressure on prices.
Interest rates, which the Bank of England utilises to control inflation, are anticipated to rise rather than fall. Following a recent meeting of the Bank’s rate-setting committee, Governor Andrew Bailey indicated that the scope for rate cuts seems limited. As borrowing costs increase, savings may become marginally more appealing, yet the rising cost of living could diminish the purchasing power of those savings.
Why it Matters
The implications of the ongoing conflict in Iran extend far beyond immediate geopolitical concerns; they pose significant challenges for the UK economy and household finances. As rising costs for fuel, mortgages, and energy bills begin to bite, consumers may face a more constrained financial landscape. The interplay between inflation, interest rates, and consumer spending will be critical in shaping the economic trajectory in the months to come. In an interconnected global economy, the outcome of this conflict could reverberate across various sectors, ultimately influencing the financial well-being of households nationwide.
