The ongoing conflict involving Iran and its implications for international relations are beginning to reverberate through the UK economy, affecting the financial circumstances of households across the country. As petrol prices surge, mortgage rates climb, and energy bills become increasingly uncertain, the extent of these economic challenges will largely depend on the duration of the conflict and the resilience of global supply chains. Here, we explore the main areas where this geopolitical tension is likely to impact personal finances.
Escalating Fuel Costs: A Direct Hit for Motorists
Motorists in the UK have already felt the sting of rising fuel prices, with average petrol costs reaching 150.11p per litre as of Friday, a notable increase of 17.3p since the onset of hostilities. Diesel, too, has climbed dramatically, now averaging 177.68p—up 35.3p in the same timeframe, according to the RAC. The surge in prices has ignited tensions between petrol retailers and the government, with accusations of profiteering surfacing amidst the crisis. Analysts suggest that every $10 rise in crude oil prices typically translates to an increase of approximately 7p at the pump.
Although motoring organisations assert that fuel supplies remain stable, they urge drivers to limit non-essential journeys and adopt more fuel-efficient driving habits. The ripple effect of increased fuel prices is likely to extend beyond motorists, as transportation costs for goods and services may escalate, potentially leading to higher grocery prices for consumers.
Mortgage Markets: A Shift in Borrowing Costs
Prior to the conflict, there had been optimism surrounding a decline in interest rates for new fixed-rate mortgages. However, the current scenario paints a different picture. Lenders have swiftly raised mortgage rates in response to increasing funding costs and a shift in expectations regarding the base borrowing rate. The average two-year fixed-rate mortgage has surged from 4.83% in early March to 5.75%—the highest rate observed since March of the previous year. For those considering a five-year deal, rates have similarly increased from 4.95% to 5.69%.
In times of economic uncertainty, lenders often withdraw mortgage products from the market, limiting consumer choice. Currently, there are 1,620 fewer residential mortgage products available, although over 6,000 deals remain. Adam French, head of consumer finance at Moneyfacts, explains, “When lenders take the step of pulling deals rather than simply tweaking pricing, it often indicates that funding costs have moved too quickly for incremental changes to keep pace.”
Energy Bills: Impending Increases Amidst Market Volatility
Household energy bills are somewhat insulated by the price cap imposed by Ofgem, which governs gas and electricity costs in England, Wales, and Scotland. However, this cap is temporary and does not extend to all households. As it stands, the maximum price for variable energy deals is secured until July, with expectations of a decrease in April. The trajectory of wholesale energy costs in the coming months will significantly influence household bills from summer onwards. Cornwall Insight predicts that, under the current price cap, a typical dual-fuel household could see its annual energy bill rise from £1,641 to £1,934.
The government has indicated that support could be forthcoming for those in need, although any assistance may be targeted rather than universal, unlike previous measures such as the Energy Price Guarantee. Meanwhile, consumers looking to lock in fixed energy rates face a market where many providers are either withdrawing deals or raising prices. Rural households reliant on heating oil are particularly vulnerable, as there is no cap to limit costs. To alleviate this burden, Prime Minister Sir Keir Starmer announced a £53 million support package for the most affected users, with distribution managed by local authorities.
Inflationary Pressures: The Broader Economic Landscape
At the beginning of March, UK inflation was projected to hover around the Bank of England’s target of 2% for the next five years. However, the conflict has introduced new variables that are complicating these forecasts. While the Office for Budget Responsibility had anticipated inflation at 2.3% for the year, analysts are now revising their expectations upwards. The dynamic nature of the conflict makes precise inflation estimates challenging, yet forecasts suggest inflation is unlikely to reach the peak of 11.1% recorded in October 2022, owing partly to the differing agricultural impacts compared to the war in Ukraine.
The Bank of England’s primary strategy for managing inflation involves adjusting interest rates. Despite earlier indications of potential rate cuts, many analysts now anticipate that the next move will be an increase. While borrowing costs could rise, savings rates may yield slightly better returns as economic uncertainty drives individuals to save more. However, the purchasing power of these savings may diminish, impacting overall economic growth.
Broader Implications for Consumer Behaviour
The ramifications of the Iran conflict extend beyond the immediate financial pressures on households. The landscape of consumer spending is likely to shift as rising costs influence holiday choices and travel plans. Increased prices for jet fuel could lead to higher airfares, limiting the options available to those planning spring and summer getaways. Airlines, while employing strategies to mitigate costs, may ultimately have to pass some of these expenses onto customers through elevated fares or reduced flight availability.
Why it Matters
The ongoing conflict in Iran serves as a stark reminder of how geopolitical tensions can have tangible effects on everyday economic realities. From rising fuel and mortgage costs to uncertain energy bills and inflationary pressures, UK households are poised to face a challenging financial landscape. As the situation evolves, the resilience of both consumers and the broader economy will be tested, underscoring the interconnectedness of global events and local financial wellbeing.
