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The ongoing conflict involving Iran, alongside the United States and Israel, is already exerting significant pressure on the financial landscape in the UK. From rising fuel prices to increased mortgage rates, the ramifications are being felt across various sectors. The extent and permanence of these financial impacts will hinge on the duration of the conflict and the resilience of supply chains and economies as they adapt.
Rising Fuel Costs: A Burden for Motorists
Motorists in the UK are witnessing a sharp uptick in fuel prices, with average petrol costing approximately 152.8p per litre—a 20p increase since the onset of hostilities in the Middle East. Diesel prices have surged even more dramatically, now averaging 182.8p per litre, marking a 40p rise since early March. This escalation has pushed the cost of refuelling a standard 55-litre family car with diesel to £100.52, a threshold not crossed since December 2022.
Industry analysts indicate that a $10 jump in crude oil prices typically results in an additional 7p per litre at the pump. The volatility of crude oil prices, influenced by the conflict’s developments and statements from the White House, adds to the unpredictability of future costs. While motoring organisations assure consumers that fuel supplies remain stable, they recommend minimising unnecessary travel and adjusting driving habits to conserve fuel.
The implications of increased petrol prices extend beyond motorists. Higher transportation costs can trickle down to consumer goods, potentially leading to increased prices for everyday items, particularly food, as supermarkets grapple with elevated transport expenses.
Mortgage Rates: A Shift in the Housing Market
The onset of the conflict has fundamentally altered expectations surrounding mortgage rates. Prior to the outbreak of hostilities, there was optimism regarding a gradual decline in fixed and variable mortgage rates. However, the reality has shifted dramatically, with lenders now raising rates in response to rising funding costs and a prevailing sentiment that the base borrowing rate will not decrease as previously anticipated.
Average rates for two-year fixed mortgages have escalated from 4.83% in March to 5.84%, the highest level since July 2024. Similarly, five-year fixed mortgage rates have risen from 4.95% to 5.76%. The contraction of available mortgage products reflects lenders’ cautious approach during economic uncertainty, with approximately 1,600 fewer options now available, although over 6,000 deals remain on the market.
Adam French, head of consumer finance at Moneyfacts, notes that the withdrawal of mortgage products often signifies drastic changes in funding costs that outpace minor pricing adjustments. This contraction in options can pose challenges for prospective homeowners and those looking to remortgage.
Energy Bills: The Uncertain Future
Households are partially shielded from escalating energy costs due to the price cap implemented by Ofgem, which regulates gas and electricity prices in England, Wales, and Scotland. However, this cap is time-limited and does not encompass all consumers. Current projections suggest that a typical dual-fuel household could see its annual energy bill rise to £1,929 by September, up from £1,641, should wholesale prices remain elevated.
The forecast for the energy market is precarious, and a sustained period of heightened wholesale costs could lead to significant increases in household energy expenses. While the government has indicated potential support for vulnerable households, such assistance is expected to be more targeted compared to the universal Energy Price Guarantee (EPG) introduced previously.
Those reliant on heating oil, particularly in rural areas and Northern Ireland, face even greater challenges, as prices remain uncapped. Prime Minister Sir Keir Starmer has announced a £53 million support scheme aimed at aiding the most vulnerable heating oil consumers, with the distribution of funds managed by devolved authorities.
Inflation and Interest Rates: A Complicated Landscape
The UK’s inflation rate, which was expected to stabilise around the Bank of England’s target of 2%, is now facing upward pressure due to recent geopolitical developments. Predictions made prior to the conflict anticipated a modest inflation rate of 2.3% for the current year; however, the volatility introduced by the war complicates these estimates. Analysts do not expect inflation to return to the peak of 11.1% seen in October 2022, largely because the current situation differs from previous disruptions that affected food prices.
The Bank of England’s primary tool for managing inflation is the adjustment of interest rates. Although there was earlier speculation regarding potential rate cuts, many analysts now predict that the next move will likely be an increase. This shift may lead to higher borrowing costs, while savers could find slightly improved returns. Economic uncertainty often leads to increased saving, but the associated rise in living costs could diminish consumers’ purchasing power, ultimately affecting overall economic growth.
Why it Matters
The financial consequences of the Iran conflict extend far beyond immediate price increases; they represent a broader economic landscape marked by uncertainty and volatility. As consumers grapple with rising costs across essential goods and services, the implications for disposable income and spending patterns become increasingly pronounced. The interconnectedness of global events and local economies means that the impact of this conflict will be felt for some time, challenging households and policymakers alike to navigate an uncertain financial future.
