**
The ongoing conflict between Iran and Israel is beginning to have tangible effects on household finances in the UK, with implications for everything from fuel prices to mortgage rates. As the situation unfolds, the extent and duration of these financial repercussions will depend largely on the conflict’s resolution and the subsequent recovery of global supply chains. Here, we explore the key areas where consumers may feel the pinch.
Fuel Prices on the Rise
Motorists have likely noticed a spike in fuel prices at the pumps, with average petrol costs reaching 144.51p per litre, an increase of 11.7p since the onset of hostilities. Diesel prices have surged even more dramatically, climbing 23.9p to 166.24p per litre, according to data from the RAC. This rise has set off a contentious debate between fuel retailers and the government, with retailers accusing officials of using “inflammatory language” by suggesting that companies are profiting from the surge in oil prices.
Analysts indicate that a $10 increase in oil prices typically adds around 7p to the cost of petrol. While crude oil prices have seen a significant uptick, they remain volatile, fluctuating in response to developments in the conflict and remarks from the White House. If the situation persists, average petrol prices could reach around 150p per litre, prompting motoring organisations to advise drivers to limit unnecessary journeys and adopt more fuel-efficient driving habits.
The ripple effect of rising petrol prices extends beyond those who drive. Increased transportation costs can lead to higher prices for goods and services, particularly food. If supermarkets face elevated costs in transporting their products, consumers can expect to see these expenses reflected in their shopping bills.
Mortgage Rates and Borrowing Costs
Prior to the outbreak of hostilities, there was optimism regarding a gradual decline in mortgage interest rates. However, the current conflict has quickly changed that narrative, leading lenders to hike rates in response to rising funding costs and diminishing expectations for a decrease in the base borrowing rate.
The average rate for a two-year fixed mortgage has surged from 4.83% in early March to 5.35%—the highest figure since last year. For five-year fixed mortgages, the average has risen from 4.95% to 5.39%, marking a significant shift in the borrowing landscape. Homebuyers looking to secure a mortgage are now facing an average annual cost increase of £788, based on a 25-year loan of £250,000.
In times of uncertainty, lenders often withdraw mortgage products from the market, limiting consumer choice. Approximately 1,000 residential mortgage offerings have been taken off the table, although there remain over 6,600 options still available. Adam French, head of consumer finance at Moneyfacts, noted that when lenders choose to withdraw products rather than merely adjust prices, it typically signals that funding costs have escalated too quickly for minor adjustments to keep pace.
Energy Costs and Household Bills
While households in England, Wales, and Scotland benefit from a price cap on gas and electricity set by Ofgem, this cap is temporary and does not apply to everyone. Currently, the maximum price for each unit of energy under the cap is expected to last until July. Although energy prices are projected to decrease in April, the fluctuations in the wholesale energy market will ultimately dictate household energy bills come summer. A prolonged period of high wholesale prices could lead to significant increases in costs for millions of households.
Recent forecasts from Cornwall Insight suggest that under Ofgem’s price cap for July to September, an average dual-fuel household could see annual bills rise to £1,973 from the existing £1,641. However, these figures remain speculative and could change as the situation develops. Energy Secretary Ed Miliband has indicated that government intervention is possible if necessary, particularly for the most vulnerable households. Meanwhile, those relying on heating oil—particularly in rural areas—are facing steeper costs, as there is no regulatory cap. In response, Prime Minister Sir Keir Starmer has announced a £53 million support package for vulnerable heating oil users, which will be distributed through local authorities.
The Broader Economic Picture
Inflation, which measures the rising cost of living, was previously forecasted to remain around the Bank of England’s target of 2%. However, with the onset of the conflict, analysts are now predicting a rise in inflation rates. The volatile nature of the current situation complicates accurate inflation forecasting, but experts do not expect to see a return to the peak of 11.1% witnessed in October 2022. This is primarily due to the absence of similar spikes in the prices of essential commodities like food, which were significantly impacted during the war in Ukraine.
While the Bank of England strives to bring inflation closer to its target, interest rates may need to increase rather than decrease in light of current trends. As borrowing costs rise, savings could become more attractive. However, the purchasing power of those savings may diminish if the cost of living continues to escalate, potentially hindering economic growth.
Why it Matters
The ramifications of the Iran conflict extend far beyond geopolitical concerns, influencing everyday financial decisions for consumers in the UK. As costs rise across various sectors, households may find themselves under increasing pressure, impacting their spending habits and overall economic stability. Understanding these dynamics is crucial for consumers to navigate the evolving financial landscape and make informed decisions about their budgets and investments.
