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The ongoing conflict involving Iran and Israel is beginning to significantly impact household finances across the United Kingdom. From soaring fuel costs to rising mortgage rates, the repercussions of this geopolitical turbulence are felt in various sectors. As the situation develops, the long-term implications for the British economy remain uncertain, hinging on the duration of the conflict and its influence on global supply chains.
Rising Fuel Prices: A Direct Hit to Motorists
Motorists have already begun to feel the pinch at the pumps, with average petrol prices climbing to 152.8p per litre—an increase of 20p since the onset of hostilities in the region. Diesel, too, has surged, now averaging 182.8p per litre, marking a 40p rise since early March. For those filling a family car with a 55-litre tank, the cost of diesel now exceeds £100 for the first time since December 2022.
The RAC motoring organisation attributes this spike to escalating crude oil prices, which tend to react sharply to developments in the conflict and statements from the US administration. Analysts estimate that for every $10 increase in oil prices, pump costs can rise by approximately 7p per litre. While motoring groups assure that supply levels remain adequate, they advise drivers to limit non-essential journeys and adopt fuel-efficient driving practices.
The implications of rising fuel prices extend beyond individual motorists. Increased transport costs can lead to higher prices for goods, particularly food items, as supermarkets face inflated distribution expenses.
Mortgage Rates: A Shift in Financial Landscape
Before the outbreak of hostilities, there was cautious optimism regarding the potential decline in interest rates for fixed-rate mortgages. However, the current climate has reversed this trend, with lenders swiftly raising rates in response to their own increased funding costs and a revised outlook on the base borrowing rate.
As of now, the average two-year fixed mortgage rate has escalated from 4.83% in early March to 5.84%, the highest level since July 2024. Similarly, five-year fixed rates have risen from 4.95% to 5.76%. This rapid increase has led to a notable reduction in available mortgage products, with around 1,600 fewer options in circulation. Adam French, head of consumer finance at Moneyfacts, notes that lenders withdrawing products often signals that funding costs have escalated too quickly for minor adjustments to suffice.
Energy Bills and Heating Oil: A Looming Crisis
Although household energy bills in England, Wales, and Scotland benefit from a price cap set by energy regulator Ofgem, this safeguard is time-limited and doesn’t encompass all consumers. The cap is set to remain in place until July, with a temporary decrease in prices expected in April. However, the stability of the wholesale energy market is crucial in determining future costs. Cornwall Insight forecasts that a dual-fuel household could see annual bills rise to £1,929 by late summer, up from £1,641 currently.
Should wholesale prices remain high, the government may need to intervene, akin to the Energy Price Guarantee (EPG) implemented during previous spikes linked to the Covid pandemic and Russia’s invasion of Ukraine. Chancellor Jeremy Hunt has indicated that targeted support could be on the horizon for those most in need, diverging from the blanket approach of the EPG.
The situation is particularly precarious for households reliant on heating oil, commonly used in rural areas and Northern Ireland, where prices are unregulated. Prime Minister Sir Keir Starmer has announced a £53 million support package for vulnerable households using heating oil, which will be distributed through local authorities.
Inflation and Interest Rates: A Complex Forecast
At the beginning of March, the UK’s inflation rate was projected to hover around the Bank of England’s target of 2% over the next five years. However, the recent escalation in geopolitical tensions has thrown this forecast into disarray, with analysts now predicting an uptick in inflationary pressures. The Office for Budget Responsibility had estimated a modest inflation rate of 2.3% for this year, but the conflict’s impact complicates these predictions.
While it is unlikely that inflation will reach the peak of 11.1% seen in October 2022, the uncertainty surrounding the conflict makes future projections challenging. Consequently, interest rates may not decrease as previously anticipated; instead, they could rise further as the Bank of England seeks to rein in inflation. This shift could make borrowing more expensive, while potentially offering slightly better returns for savers.
Why it Matters
The unfolding Iran-Israel conflict poses a significant threat to the financial stability of UK households, with rising fuel prices, increased mortgage rates, and escalating energy bills compounding the cost of living crisis. As these pressures mount, the government’s fiscal response will be critical in mitigating the impact on vulnerable populations. The situation underscores the interconnectedness of global events and local economies, highlighting the need for consumers to remain vigilant and adaptable in a rapidly changing financial landscape.
