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The ongoing conflict between the US-Israeli alliance and Iran is beginning to cast a shadow over household finances in the UK. From escalating petrol prices to surging mortgage rates, the financial implications are already being felt. The longevity of the conflict and the subsequent recovery of global supply chains will dictate the extent of these impacts. Here’s a closer look at the key areas that could affect your finances.
Fuel Prices on the Up
Motorists across the UK may have noticed a sharp uptick in fuel costs recently. As of Friday, average petrol prices surged to 140.6p per litre, marking an 18-month high—an increase of nearly 8p since hostilities escalated. Diesel prices have also risen significantly, climbing by approximately 17p to reach 159.2p per litre, according to the RAC. This spike has ignited tensions between petrol retailers and the government, with accusations of profiteering amid soaring oil prices.
Analysts suggest that a $10 rise in crude oil prices typically leads to an approximate 7p increase at the pump. While crude prices remain volatile, fluctuating with developments from the conflict and statements from the US government, there is a possibility that petrol could average around 150p per litre if these elevated oil prices persist. While there are reports of ample fuel supplies, motoring organisations encourage drivers to limit non-essential trips and adopt more fuel-efficient driving habits to mitigate costs.
These fuel price increases don’t only affect drivers; they can also lead to higher prices for consumer goods. When transport costs escalate, retailers may pass these expenses on to customers, resulting in increased prices for everyday items.
Mortgage Rates: A Shift in the Trend
Prior to the onset of the conflict, many anticipated a gradual decrease in interest rates for fixed and variable mortgages. However, the situation has now reversed. Major UK lenders have begun to raise rates, driven by climbing funding costs and a revised outlook for the base interest rate.
As of Friday, the average rate for a two-year fixed mortgage hit 5.10%, up from 4.84% earlier this month—the highest level since July. In the same vein, five-year fixed rates have increased from 4.96% to 5.19%, marking the steepest prices since April. The uncertainty surrounding the conflict has led lenders to withdraw over 500 mortgage products from the market, reducing options for borrowers. Adam French, head of consumer finance at Moneyfacts, noted that such withdrawals often signal that financing costs are outpacing incremental price adjustments.
Energy Bills and Heating Oil Prices
While households in England, Wales, and Scotland benefit from a price cap on gas and electricity bills established by energy regulator Ofgem, this cap is not permanent and doesn’t cover everyone. The maximum price for energy units under the cap is set to remain until July, with potential reductions anticipated in April. However, the future of energy bills hinges on the wholesale energy market’s performance in the coming months. A sustained rise in wholesale prices could lead to significant increases for millions of households.
In previous energy crises, such as those following the COVID-19 pandemic and Russia’s invasion of Ukraine, government intervention became necessary. Energy Secretary Ed Miliband has stated that the government is prepared to step in if the conflict leads to severe impacts on energy prices, although he cautioned that any intervention would depend on the situation’s scale.
For households reliant on heating oil, particularly in rural areas and Northern Ireland, the situation is more precarious. Without a price cap, costs for heating oil have reportedly more than doubled since the conflict escalated, and panic buying has strained supplies. Emma Simpson from Rural Action Derbyshire highlighted that individuals running low on oil cannot afford to wait for prices to drop. Chancellor Rachel Reeves has announced upcoming support for households grappling with high heating oil costs.
The Broader Economic Outlook
Just last month, UK inflation was projected to hover around the Bank of England’s target of 2% over the next five years. However, the onset of conflict has complicated these projections. Analysts are now reevaluating inflation estimates, as the military and economic volatility makes predictions increasingly challenging. While it is unlikely that inflation will return to the peak of 11.1% seen in October 2022, the situation remains fluid.
Interest rates, which the Bank of England uses as a tool to control inflation, are also expected to remain higher for longer. Analysts who had previously anticipated rate cuts are now reconsidering those forecasts, as the economic backdrop shifts. Borrowing is likely to become more expensive, while savings may offer slightly better returns, though the rising cost of living could diminish the spending power of those savings.
Why it Matters
The implications of the Iran conflict on everyday finances extend far beyond immediate costs. Families and individuals are facing a perfect storm of rising fuel prices, increased mortgage rates, and uncertain energy bills, all of which contribute to a higher cost of living. As these financial pressures mount, the government’s response and the global economic climate will play crucial roles in determining how households will navigate this challenging landscape in the months ahead. The financial strain could influence consumer behaviour and spending patterns, potentially impacting the broader UK economy.
