The ongoing military conflict involving Iran is already creating ripples across the UK economy, pushing up costs for everyday essentials. From soaring petrol prices to increasing mortgage rates, consumers are feeling the financial strain. The long-term impact of these changes will largely depend on the establishment and sustainability of a ceasefire, as well as the subsequent recovery of global supply chains. Here’s a closer look at the key areas affected.
Fuel Prices on the Rise
Motorists have been grappling with escalating fuel costs, which have surged significantly since the onset of the hostilities. Petrol prices now average 157.71p per litre, a stark increase of 25p since the conflict began. Diesel fares have similarly climbed to 190.62p per litre—up 48p in the same timeframe. For the average family car, filling up with petrol now costs an additional £13, while diesel consumers face an increase of £26.
This spike in prices has ignited debates between fuel retailers and the government. Retailers have accused officials of using “inflammatory language” regarding alleged profiteering from the oil price surge. Analysts have indicated that for every $10 rise in oil prices, pump prices typically increase by around 7p per litre. While supplies remain stable according to motoring organisations, they advise consumers to limit non-essential travel and adjust driving habits to conserve fuel.
Mortgage Rates and Financial Pressure
Prior to the conflict, there was optimism about a gradual drop in interest rates for fixed and variable mortgage products. However, the situation has reversed dramatically. Lenders have swiftly raised rates in response to rising funding costs and a changing economic outlook. The average rate for a two-year fixed mortgage has surged from 4.83% in early March to 5.90%, marking the highest rate since July 2024. Similarly, the average five-year fixed deal has increased from 4.95% to 5.78%.
These hikes have resulted in a reduction of available mortgage products, with approximately 1,500 fewer options currently on the market, although over 6,000 remain accessible. As uncertainty looms, it may take time before rates begin to decline, despite optimistic market reactions to recent ceasefire discussions.
The Impact on Energy Bills
While household gas and electricity costs are somewhat shielded by Ofgem’s price cap, which remains effective until July, this safeguard is limited and does not extend to everyone. The cap has led to a temporary reduction in prices since early April, but the coming months may see a sharp rise in energy costs as wholesale prices fluctuate. Cornwall Insight forecasts that, under Ofgem’s cap for July to September, a dual-fuel household could see annual bills rise to £1,871—up from £1,641.
Furthermore, there is no cap on heating oil prices, which heavily affects rural households and those in Northern Ireland. Prime Minister Sir Keir Starmer recently announced a £53 million support package for vulnerable heating oil users, to be distributed through local authorities. The Competition and Markets Authority is also scrutinising market fairness to ensure customers are treated appropriately amid rising costs.
Inflation and Interest Rates: An Uncertain Future
As the conflict unfolds, the trajectory of UK inflation is becoming increasingly uncertain. The Office for Budget Responsibility had previously projected inflation to align closely with the Bank of England’s target of 2%. However, the war has led analysts to revise these expectations upward, complicating future forecasts. While any immediate spikes to the record high of 11.1% seen in October 2022 are deemed unlikely, the volatility of the situation makes precise predictions challenging.
Amid this backdrop, the Bank of England faces pressure to manage inflation effectively, primarily through interest rate adjustments. While previous discussions hinted at potential cuts, many now speculate that the next move may involve an increase. This could make borrowing more expensive while potentially offering slightly better returns for savers. However, the overall economic climate suggests that the purchasing power of savings may diminish as living costs rise.
Why it Matters
The financial implications of the Iran conflict extend far beyond immediate price increases. As households grapple with rising fuel and energy costs, alongside increased mortgage rates, the overall cost of living is set to rise. This strain may lead to reduced consumer spending, which in turn could stifle economic growth. As the situation evolves, UK consumers must remain vigilant about their finances, adapting to a landscape that is both volatile and unpredictable.