The ongoing conflict in Iran involving the US and Israel is beginning to exert significant pressure on the financial landscape in the UK. Households are already feeling the repercussions, with rising petrol prices, fluctuating mortgage rates, and potential hikes in energy bills. The duration and escalation of the conflict will ultimately determine the depth of these financial strains, as the global economy grapples with uncertainty.
Fuel Prices Surge
Motorists across the UK have likely noticed a sharp increase in fuel costs. The average price of petrol has surged to £1.528 per litre, marking a £0.20 uptick since hostilities began. Diesel prices have escalated even further, now averaging £1.828 per litre—a £0.40 increase since early March. This escalation means that filling a 55-litre family car with diesel now costs over £100, a first since December 2022.
The RAC reports that every $10 rise in crude oil prices translates to an approximate £0.07 increase at the pump. Crude oil prices have indeed been volatile, responding to both the conflict’s developments and commentary from US officials. While motoring organisations indicate a sufficient supply of fuel, they recommend that drivers limit unnecessary journeys and adopt more fuel-efficient driving habits.
Moreover, the implications of rising petrol prices extend beyond the forecourts. Increased transport costs may lead to higher prices for goods and services, particularly in the food sector, as supermarkets pass on their elevated distribution expenses to consumers.
Mortgage Market in Flux
The war has also disrupted expectations in the mortgage market. Prior to the conflict, many anticipated a decline in interest rates for both fixed and variable mortgages. Instead, lenders have swiftly increased rates, adjusting to rising funding costs and a shift in the outlook on the base borrowing rate.
As of now, the average two-year fixed mortgage rate has climbed to 5.84%, up from 4.83% at the beginning of March, marking its highest point since July 2024. For five-year fixed deals, the average rate has jumped from 4.95% to 5.76%, also reaching its highest level since late 2023.
In an environment of economic uncertainty, lenders have begun withdrawing mortgage products, reducing the number of available options. Currently, there are approximately 1,600 fewer residential mortgage products on the market, although over 6,000 remain accessible. Adam French, head of consumer finance at Moneyfacts, noted that when lenders retract deals instead of simply adjusting prices, it often signals that funding costs have escalated too rapidly for incremental adjustments.
Energy Costs on the Rise
While households in England, Wales, and Scotland benefit from a price cap on energy bills set by regulator Ofgem, this cap is not without limitations. It is temporary and does not apply to everyone. Although wholesale energy prices have shown signs of decline, they are expected to fluctuate significantly through late May, with implications for household bills in the summer months.
Cornwall Insight’s latest forecasts suggest that a typical dual-fuel household could see its annual energy costs rise to £1,929 by this summer, up from the current £1,641. This estimate hinges on the volatile wholesale market, which has previously necessitated government intervention, such as the Energy Price Guarantee during earlier crises.
For those reliant on heating oil—predominantly in rural areas—costs have no cap, leaving users particularly vulnerable. In response, Prime Minister Sir Keir Starmer announced a £53 million support package for the most at-risk households. This funding will be administered through devolved authorities, allowing local councils to determine eligibility and distribution of support.
Inflationary Pressures and Economic Outlook
At the start of March, UK inflation was projected to hover around the Bank of England’s target of 2% over the next five years, according to the Office for Budget Responsibility (OBR). However, the onset of conflict in Iran has shifted this outlook, and analysts now expect a resurgence in inflation rates.
While it is unclear how high inflation might climb, it is widely anticipated that it will not reach the alarming peak of 11.1% recorded in October 2022. The unique dynamics of the current situation—compared to past crises like the Covid pandemic and Russia’s invasion of Ukraine—suggest that the effects on basic foodstuff prices may differ.
Interest rates, a primary tool for managing inflation, could also see upward adjustments rather than the previously anticipated cuts. The Bank of England has maintained the base rate at 3.75%, with many analysts predicting that the next movement will be an increase.
In an uncertain economic climate, consumers may be inclined to hoard savings, leading to a potential decrease in spending power as the cost of living rises. This could hamper overall economic growth in the UK.
Why it Matters
The unfolding situation in Iran is not merely a geopolitical issue; it has substantial ramifications for everyday financial realities in the UK. Households are already grappling with higher costs across fuel, mortgages, and energy bills, and the conflict’s duration will significantly influence these pressures. As financial markets respond to the instability, consumers may find themselves navigating a landscape of rising costs and reduced options, underscoring the interconnectedness of global events and local economies.
