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The ongoing conflict involving Iran is starting to make its mark on the finances of households across the UK, with rising costs in fuel, mortgage rates, and energy bills. As tensions escalate, consumers are left to grapple with the financial repercussions. A leading think tank has projected that the average working-age household may find itself hundreds of pounds worse off this year due to the unfolding events in the Middle East.
Fuel Prices on the Rise
Motorists are already feeling the pinch at the petrol pumps, with significant increases in fuel prices since the onset of the hostilities. As crude oil prices have surged, so too have the costs for drivers. As of 13 April, the average price of petrol soared to 158.27p per litre, marking an increase of over 25p since the conflict began. Diesel prices have seen even steeper rises, now averaging 191.5p per litre, which is nearly 49p higher than earlier in March.
For the average family car, filling up with petrol has grown £14 more expensive, while diesel drivers are facing an additional £27 at the pump. Simon Williams, head of policy at the RAC, noted that while the pace of price increases is decelerating, any potential for reductions hinges on the outcome of peace negotiations. “It’s a highly volatile situation with much depending on what happens with the Strait of Hormuz,” he remarked.
This increase in fuel costs is not only a burden for individual drivers but also affects the broader economy. Higher transportation costs for supermarkets could lead to inflated prices for everyday goods, ultimately impacting consumers even if they do not own a car.
Mortgage Rates Take a Hit
Before the conflict erupted, there was optimism that interest rates for fixed-rate mortgages would continue to decline. However, lenders have rapidly raised their rates in response to escalating funding costs and shifting expectations for the base borrowing rate. According to Moneyfacts, the average two-year fixed mortgage rate has leapt from 4.83% in early March to 5.89% currently. Similarly, five-year fixed rates have increased from 4.95% to 5.77% over the same timeframe.
As lenders become more cautious during uncertain economic periods, many have pulled mortgage products from the market, resulting in fewer options for prospective buyers. Currently, there are approximately 1,500 fewer residential mortgage products available, although over 6,000 remain on offer.
Energy Bills and Heating Oil Costs
Households are somewhat shielded from skyrocketing gas and electricity bills due to a price cap set by energy regulator Ofgem. However, this cap is temporary and not universally applicable. While energy prices fell slightly at the beginning of April, the looming question is how the ongoing conflict will influence wholesale energy costs moving forward. Analysts anticipate that unless a ceasefire holds, energy prices could rise significantly this summer.
The latest forecasts from Cornwall Insight predict that a typical dual-fuel household could see annual bills climb to £1,861 from the current £1,641 under the price cap effective from July to September. The government has hinted at potential support for those struggling with their energy bills as winter approaches, although this aid is expected to be more targeted compared to previous measures.
For those reliant on heating oil—common in rural areas and Northern Ireland—costs continue to soar without any cap to limit prices. In response, Prime Minister Sir Keir Starmer announced a £53 million support package aimed at vulnerable users of heating oil, which will be administered through local councils.
The Cost of Living: An Uncertain Future
As of March, inflation forecasts had suggested a return to the Bank of England’s target rate of 2% by 2027. However, this outlook was established before the Iran airstrikes began, and analysts now warn that inflation is likely to rise. The Resolution Foundation estimates that higher energy prices could leave the average working-age household £480 poorer this year. While some low-income households may benefit from increased benefits, many still face a significant decrease in purchasing power.
In a climate of rising costs, the Bank of England faces pressure to manage inflation, primarily through adjusting interest rates. After holding the Bank rate at 3.75% in February, the consensus among analysts is that future movements may see rates increase rather than decrease.
Why it Matters
The economic impact of the Iran conflict extends beyond immediate financial burdens, influencing everything from household budgets to broader economic stability. As essential goods and services face rising costs, the average consumer’s purchasing power diminishes, creating a cycle of financial strain that could affect economic growth. With uncertainty dominating the geopolitical landscape, how consumers navigate these challenges will be pivotal in shaping the UK’s economic future.