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The ongoing conflict between Israel and Iran is beginning to reverberate across the UK economy, leading to increased living costs that could further strain household budgets. From surging petrol prices to hikes in mortgage rates, the ramifications of this geopolitical turmoil are already being felt. As the situation develops, the depth and duration of these financial impacts remain uncertain, largely hinging on the conflict’s escalation and its influence on global supply chains.
Fuel Prices: A Surge at the Pumps
Motorists across the UK are witnessing a significant uptick in fuel costs. As of Friday, the average price of petrol reached 150.11p per litre, marking an increase of 17.3p since the onset of hostilities. Diesel prices have similarly surged, climbing by 35.3p to an average of 177.68p per litre, according to data from the RAC.
This sudden spike has ignited a debate between fuel retailers and government officials, with accusations aimed at the latter for employing “inflammatory language” regarding potential profiteering amidst rising oil prices. Analysts suggest that a $10 increase in crude oil prices typically translates to a 7p rise at the pump. Although current supplies remain stable, motoring organisations are advocating for reduced non-essential travel and more fuel-efficient driving techniques to mitigate costs.
Higher fuel prices don’t just affect drivers directly; they also have a cascading effect on the prices of goods and services. Increased transportation costs for supermarkets, for instance, could ultimately filter down to consumers, impacting food prices across the board.
Mortgage Rates: An Unfavourable Turn
Before the conflict erupted, there was a prevailing expectation of a gradual decline in interest rates for both new fixed and variable mortgages. However, lenders have swiftly reversed this trend, hiking rates in response to rising funding costs and shifting market expectations regarding base borrowing rates.
The average rate for a two-year fixed mortgage has surged from 4.83% in early March to 5.75%, the highest level witnessed since March of the previous year. For five-year fixed deals, rates have climbed from 4.95% to 5.69% during the same timeframe. This rapid increase has resulted in a diminished selection of mortgage products, with approximately 1,620 fewer options available in the market, although over 6,000 remain.
Adam French, head of consumer finance at Moneyfacts, noted that when lenders retract products instead of merely adjusting prices, it commonly signals that funding costs are rising too quickly for traditional pricing strategies to keep pace.
Energy Bills: Protection with Caveats
For UK households, there is a degree of protection against soaring energy bills due to the price cap enforced by Ofgem, which governs energy prices in England, Wales, and Scotland. However, this price cap is temporary and does not encompass all consumers. The cap is set to remain in effect until July, with a reduction in prices anticipated for April.
Nevertheless, fluctuations in wholesale energy costs in the coming months will play a pivotal role in shaping energy prices from summer onwards. Cornwall Insight’s recent forecast suggests that households with dual-fuel arrangements could see their annual bills rise from £1,641 to £1,934, pending sustained high wholesale costs.
The government has indicated it may intervene with targeted support if necessary, focusing on vulnerable households rather than a universal approach. Additionally, those reliant on heating oil—common in rural regions—are facing unregulated price hikes, with Prime Minister Sir Keir Starmer announcing £53 million in assistance for those most affected.
Inflation and Interest Rate Forecasts
As inflation figures were initially projected to fall to the Bank of England’s target rate of 2% over the next five years, the outbreak of conflict has thrown these estimates into disarray. Following the commencement of hostilities, analysts have now adjusted their outlook, anticipating an increase in inflation rates. Despite this, expectations suggest that inflation may not reach the peak levels observed in October 2022, when it hit 11.1%, largely due to different supply chains affected by the Ukraine conflict.
The Bank of England, tasked with maintaining inflation near 2%, has adopted a cautious approach, holding its base rate at 3.75%. Many analysts predict that the next adjustment may be an increase rather than a decrease, leading to more expensive borrowing. Conversely, savings rates could improve as economic uncertainty often drives individuals to save more, although the diminishing purchasing power of these savings due to rising living costs could dampen overall economic growth.
The Broader Economic Picture
The wider implications of the Iran conflict on UK finances extend beyond immediate cost increases. Travel and leisure industries are particularly vulnerable, as rising jet fuel prices could lead to more expensive flight fares and limited holiday options this spring and summer. Though airlines often utilise hedging strategies to buffer against price fluctuations, protracted increases in aviation fuel may compel them to pass on costs to consumers, resulting in higher fares or reduced flight availability.
Why it Matters
The interplay between geopolitical instability and domestic economic conditions underscores the fragility of the UK’s financial landscape. With rising costs impacting everyday expenses, households may face increasing pressure on their budgets, leading to a potential slowdown in consumer spending. As the conflict unfolds, the financial repercussions could extend beyond mere price increases, potentially reshaping the UK’s recovery trajectory and overall economic resilience in the face of global uncertainties.
