The ongoing conflict in Iran, particularly the escalating tensions involving Israel and the United States, is beginning to have tangible effects on UK households. From the cost of fuel to mortgage rates, the economic repercussions are being felt across various sectors. As the situation develops, the depth and duration of these financial impacts will largely hinge on the effectiveness of ceasefire efforts and the subsequent recovery of supply chains.
Fuel Prices Surge for Drivers
Motorists are already feeling the pinch at the petrol station, with average fuel prices climbing sharply. Current petrol costs have soared to 157.71p per litre—an increase of 25p since the outbreak of hostilities. Diesel, too, has seen a dramatic rise, now averaging 190.62p per litre, which is an increase of 48p since early March. This translates to an additional £13 for filling up a typical family car with petrol, and a staggering £26 for diesel.
The recent spikes in fuel prices ignited a controversy between petrol retailers and the government, with accusations of profiteering being thrown around. Analysts noted that for every $10 increase in oil prices, there’s a corresponding rise of about 7p at the pump. The volatility of crude oil prices is closely tied to the conflict’s developments and statements from the US government. Experts suggest that even if oil shipments resume through the Strait of Hormuz during a ceasefire, it may take some time before motorists see any relief at the pumps.
While driving organisations assure that fuel supplies are adequate, they recommend cutting back on non-essential journeys and adopting more fuel-efficient driving habits.
Mortgage Rates on the Rise
The housing market is not immune to the effects of conflict-induced economic uncertainty. Prior to the war, there were expectations of decreasing interest rates on both new fixed and variable mortgages. However, the tide has turned dramatically. Lenders have hastily increased rates in response to their own rising costs and a shift in the outlook for base borrowing rates.
The average two-year fixed mortgage rate has jumped from 4.83% in early March to 5.90%—the highest level since July 2024, according to Moneyfacts. For those seeking five-year fixed deals, the average rate has risen from 4.95% to 5.78%, marking its highest point since November 2023.
Economic uncertainty often leads lenders to withdraw mortgage products from the market, resulting in reduced options for consumers. Currently, there are about 1,500 fewer mortgage products available, but there are still over 6,000 options for borrowers to consider. A return to lower mortgage rates may take longer than expected, even with some positive market reactions to ceasefire announcements.
Energy Bills and Heating Oil Costs
While households in England, Wales, and Scotland benefit from a price cap on gas and electricity, this cap is time-limited and does not apply universally. Set by energy regulator Ofgem, the maximum price per unit for variable deals is in effect until July, after which the dynamics of wholesale energy markets will determine future bills.
Forecasts from Cornwall Insight predict that, under Ofgem’s cap, the average dual-fuel household could see their annual energy bill rise from £1,641 to £1,871 during the peak summer months, depending on market conditions. The previous spike in energy prices following the Covid pandemic and the conflict in Ukraine led to government intervention through the Energy Price Guarantee (EPG), which provided support across the board. The Chancellor has hinted at targeted assistance for vulnerable households this winter, though it will not be as broad as the previous EPG.
Moreover, for those relying on heating oil—especially in rural areas—prices are soaring without any cap to mitigate costs. In response, Prime Minister Sir Keir Starmer has announced £53 million in support for vulnerable users of heating oil, to be distributed through local authorities. The Competition and Markets Authority is also scrutinising suppliers to ensure fair pricing practices.
Inflationary Pressures and Economic Outlook
Just a few months ago, UK inflation was expected to stabilise around the Bank of England’s target of 2% over the next five years. However, with the onset of the conflict in Iran, analysts are now forecasting a rise in inflation rates. The situation complicates the government’s ability to predict economic trends, making accurate inflation estimates increasingly challenging.
Despite the uncertainty, experts do not anticipate a return to the peak 11.1% inflation rate recorded in October 2022, as the current conflict differs significantly from the Ukraine situation, which had a direct impact on food prices due to Ukraine’s agricultural output.
With the Bank of England focused on controlling inflation, predictions suggest that rather than decreasing, interest rates may well continue to rise. Higher borrowing costs could dampen consumer spending, further impacting economic growth. Conversely, savings rates might become slightly more attractive as consumers seek to preserve their wealth amid rising living costs.
Why it Matters
The financial implications of the conflict in Iran extend far beyond the immediate rise in fuel and energy prices. As households grapple with higher mortgage rates and the potential for increased inflation, the overall cost of living is poised to rise significantly. This situation underscores the interconnectedness of global events and local economies, emphasising the need for consumers to remain vigilant and adaptive in their financial planning. Understanding these dynamics is crucial for navigating the evolving economic landscape in the UK.
