As the conflict between Israel and Iran escalates, its repercussions are being felt far beyond the Middle East. In the UK, rising costs—spanning petrol to mortgages—are beginning to squeeze household budgets. The extent of these changes hinges on the duration of the conflict and the recovery of global supply chains. Here’s a breakdown of what consumers need to watch.
Rising Fuel Costs
Motorists have already noticed a surge in petrol prices, with the average cost hitting 150.11p per litre as of last Friday, marking a significant increase of 17.3p since the onset of the conflict. Diesel prices have surged even more dramatically, climbing to 177.68p—a 35.3p rise. This spike has ignited a debate between petrol retailers and the government, with accusations of profiteering amid the turmoil.
Analysts suggest that for every $10 increase in crude oil prices, pump prices can rise by approximately 7p per litre. While current supplies remain stable, motoring organisations are urging drivers to limit unnecessary journeys and adopt more fuel-efficient driving habits. It’s important to note that even those who don’t drive will feel the impact of rising transport costs, as they often translate into higher prices for everyday goods.
Mortgage Market Shifts
Prior to the conflict, there was a silver lining for homebuyers, with expectations of declining interest rates on fixed and variable mortgages. However, lenders have swiftly raised rates in response to increasing funding costs, leading to a dramatic shift in the mortgage landscape. The average two-year fixed mortgage rate has surged from 4.83% in early March to 5.75%, the highest point since last year. Similarly, five-year fixed rates have also risen, climbing from 4.95% to 5.69%.
As economic uncertainty looms, lenders are pulling a significant number of mortgage products off the market, further constraining consumer choice. Currently, there are 1,620 fewer mortgage options available, although over 6,000 deals still remain. Adam French, head of consumer finance at Moneyfacts, noted that when lenders pull products, it signals that their funding costs have escalated too rapidly for minor adjustments to be effective.
Energy Prices and Household Bills
Household energy bills are partially shielded by a price cap set by Ofgem, which regulates costs in England, Wales, and Scotland. However, this cap is temporary and not all consumers benefit from it. The current limit on energy prices is due to expire in July, and predictions suggest that if high wholesale energy prices persist, household bills could see a sharp increase.
Cornwall Insight forecasts that a typical dual-fuel household could see annual bills rise to £1,934 from £1,641 under the new price cap. This prediction, however, remains speculative and hinges on the volatility of global energy markets. In the past, the government intervened with the Energy Price Guarantee (EPG) to assist consumers during price spikes, and Chancellor Jeremy Hunt has indicated that targeted support could be forthcoming for those in need.
For users of heating oil, particularly in rural areas, the situation is dire. Prices have been rising without a regulatory cap, and Prime Minister Sir Keir Starmer recently announced a £53 million support package for vulnerable households reliant on heating oil. Local councils will determine eligibility and distribution of these funds.
Inflation and Interest Rate Outlook
As of March, UK inflation was projected to hover around the Bank of England’s target of 2%. However, with the onset of the conflict, analysts are now revising their forecasts upwards, indicating inflation is likely to rise. Although estimates suggest it may not reach the peak of 11.1% seen in October 2022, the current geopolitical climate complicates predictions.
The Bank of England, tasked with controlling inflation, has maintained interest rates at 3.75% following a wait-and-see approach. However, many analysts now predict that the next move may be an increase rather than a cut, making borrowing more expensive. This could impact consumer spending, as people may hold back on expenditures amidst rising living costs.
Broader Economic Implications
The ramifications of the Iran conflict extend beyond immediate financial concerns. Travel costs are likely to rise as airline fuel prices escalate, potentially limiting holiday options for consumers this spring and summer. As airlines navigate these challenges, passengers may face higher fares or reduced flight availability.
Why it Matters
The ongoing conflict is reshaping the economic landscape for UK consumers, amplifying existing pressures from inflation and rising costs of living. As fuel prices climb and mortgage rates shift, households must navigate a complex financial environment. Understanding these developments is crucial, as they will influence daily expenses and long-term financial planning. The situation remains fluid, and consumers should stay informed about potential changes that could affect their financial well-being in the months ahead.