The ongoing conflict involving Iran has begun to reverberate through the UK economy, impacting essential costs such as fuel and housing. With inflationary pressures already heightened, the war’s duration and the resilience of supply chains will be critical in determining the extent of these financial repercussions. As consumers brace for potential increases in everyday expenses, several key areas warrant close examination.
Rising Fuel Prices: A Burden for Motorists
UK motorists have already felt the pinch at the petrol pump, with average fuel prices escalating significantly since the onset of hostilities. As of Friday, the average cost of petrol reached 150.11p per litre, marking an increase of 17.3p, while diesel surged by 35.3p to 177.68p, according to the RAC. This uptick has sparked a contentious debate between petrol retailers and the government, with retailers accusing officials of inflammatory rhetoric suggesting profiteering amidst the oil price surge.
Analysts have indicated that a $10 increase in crude oil prices typically results in a rise of approximately 7p per litre at the pumps. Given the volatility of crude prices, which fluctuate in response to the conflict’s developments and statements from the White House, the trajectory of fuel costs remains uncertain. While motoring organisations assert that supply levels are adequate, they are advising motorists to limit non-essential journeys and adopt more fuel-efficient driving behaviours to mitigate costs.
Mortgage Rates: A Shifting Landscape
Before the outbreak of hostilities, there was optimism regarding a gradual decline in interest rates for both fixed and variable mortgages. However, lenders have rapidly adjusted their rates upwards in response to increased funding costs and a prevailing expectation that the base rate will remain elevated longer than previously anticipated.
Data from Moneyfacts reveals that the average rate for a two-year fixed mortgage has climbed from 4.83% at the beginning of March to 5.75%, the highest level since March of the previous year. Similarly, the average five-year fixed rate has risen from 4.95% to 5.69%, now at its peak since July 2024. As lenders curtail the availability of mortgage products—1,620 fewer options are currently on the market—borrowers face a reduced selection at a time when rates are escalating.
Adam French, head of consumer finance at Moneyfacts, noted that when lenders opt to withdraw products rather than merely adjust pricing, it often signals that funding costs have outpaced the ability to make incremental changes.
Energy Bills: Navigating Uncertainty
Household energy bills are somewhat shielded by the price cap established by Ofgem, which regulates costs for gas and electricity in England, Wales, and Scotland. However, this cap is temporary and does not encompass all consumers. Current projections indicate that the maximum price for energy units will remain fixed until July, with a decrease expected in April. Yet, the forthcoming wholesale energy market conditions will significantly influence household bills from summer onwards.
Cornwall Insight forecasts suggest that a dual-fuel household could see annual bills rise to £1,934 by the next price cap period, up from £1,641. This prediction, however, is subject to considerable uncertainty, particularly given the previous spikes triggered by events such as the COVID-19 pandemic and Russia’s incursion into Ukraine. The Chancellor has hinted at potential government support for vulnerable households, though any assistance would likely be more targeted than the previous universal Energy Price Guarantee.
For those reliant on heating oil—particularly in rural areas and Northern Ireland—there is no price cap, exacerbating the financial strain. Prime Minister Sir Keir Starmer has announced a £53 million support package for the most vulnerable users of heating oil, which local councils will administer.
Inflation and Interest Rates: A Complex Equation
In March, the Office for Budget Responsibility (OBR) had forecasted UK inflation to hover around the Bank of England’s target of 2% for the next five years. However, the current military conflict has dramatically altered these projections. Analysts now predict that inflation is on an upward trajectory, complicating the task of providing accurate forecasts.
Despite the volatility, it is unlikely that inflation will reach the October 2022 peak of 11.1%. The situation differs significantly from the previous crisis stemming from the war in Ukraine, which severely disrupted the supply of essential commodities like wheat and edible oils.
The Bank of England’s primary mechanism to combat inflation is through interest rate adjustments. Following the latest monetary policy meetings, speculation suggests that the next move may be an increase rather than a decrease. While borrowing could become costlier, savers may see slightly improved returns. However, as living costs rise, the real value of savings may diminish, potentially stunting economic growth.
Broader Economic Concerns: Travel and Leisure Costs
The financial ramifications of the Iran conflict extend beyond fuel and housing, affecting leisure spending as well. With jet fuel prices soaring, holidaymakers may face higher flight costs and reduced destination options for spring and summer travel. Although airlines employ strategies to cushion the blow from rising fuel prices, the ongoing geopolitical instability could prolong elevated aviation costs, ultimately leading to increased ticket prices and fewer available flights.
Why it Matters
The implications of the Iran conflict on the UK economy are profound, particularly for households already grappling with the cost of living crisis. Rising fuel and mortgage rates, coupled with potential increases in energy bills, are set to squeeze disposable incomes further. As the situation unfolds, it will be crucial for policymakers to respond effectively to mitigate the financial burdens on consumers, ensuring that support is targeted and timely. With economic uncertainty looming, the need for strategic interventions to protect vulnerable populations has never been more pressing.
