The ongoing conflict involving Iran has begun to reverberate through the UK economy, influencing everything from petrol prices to mortgage rates. As the situation evolves, the extent and duration of these financial repercussions will largely depend on the conflict’s trajectory and the resilience of global supply chains. Here, we examine the key areas where consumers may feel the pinch.
Rising Fuel Costs: A Strain on Motorists
Motorists across the UK are already feeling the impact of escalating fuel prices. According to the RAC, the average petrol price has surged to 152.8 pence per litre, a 20 pence increase since the onset of hostilities in Iran. Diesel prices have experienced an even sharper rise, now averaging 182.8 pence per litre, marking a 40 pence jump since early March. For drivers, this translates to a staggering £100.52 for a full tank in a typical 55-litre family diesel car, a threshold not crossed since December 2022.
This upward trend in fuel prices has sparked debates between petrol retailers and the government, with accusations of profiteering surfacing. Analysts have indicated that every $10 increase in oil prices can lead to an approximate 7 pence rise at the pumps. As crude oil prices become increasingly volatile, reflecting the fluid nature of the conflict and the responses from the White House, consumers are advised to limit non-essential travel and adopt more fuel-efficient driving habits to mitigate costs.
Moreover, the implications of rising fuel prices extend beyond individual motorists. Increased transport costs for supermarkets could lead to higher grocery prices, affecting households nationwide.
Mortgage Rates: A Shift in Economic Expectations
The backdrop of the Iran conflict has altered the landscape of mortgage interest rates, which were previously expected to decline steadily. Instead, lenders are now rapidly increasing rates, driven by heightened funding costs and a shift in expectations regarding the base borrowing rate. According to Moneyfacts, the average two-year fixed mortgage rate has escalated from 4.83% at the beginning of March to 5.84% today—the highest level since July 2024. Similarly, five-year fixed rates have ascended from 4.95% to 5.76%, reaching their peak since November 2023.
The uncertainty surrounding the conflict has prompted lenders to withdraw various mortgage products, narrowing options for potential homeowners. Currently, around 1,600 fewer residential mortgage products are available compared to earlier this year, although over 6,000 remain on the market. Adam French, head of consumer finance at Moneyfacts, noted that such drastic actions often signal that funding costs are evolving too quickly for lenders to adjust their offerings incrementally.
Energy Bills and Heating Oil Costs: A Complex Landscape
While the energy price cap established by Ofgem provides some respite for household gas and electricity bills, its time-limited nature raises concerns. Currently, the cap protects variable deal users until July, during which prices are expected to decrease. However, volatility in wholesale energy markets could lead to substantial increases in household bills later this year.
Forecasts from Cornwall Insight indicate that a typical dual-fuel household could see annual energy costs rise from £1,641 to £1,929 post-July if high wholesale prices persist. The government has hinted at targeted support for vulnerable households, but this approach diverges from the universal Energy Price Guarantee established during previous crises.
For those relying on heating oil, often used in rural areas, the situation is more precarious. Without a price cap, costs can fluctuate dramatically. Prime Minister Sir Keir Starmer has announced a £53 million support package for the most vulnerable heating oil users, with distribution managed by local authorities.
Inflation and Interest Rates: Navigating Economic Uncertainty
As the conflict unfolds, UK inflation—which was previously forecasted to align with the Bank of England’s target of 2%—is now projected to rise. The Office for Budget Responsibility initially estimated a modest inflation rate of 2.3% for this year, but analysts now anticipate that the economic turbulence caused by the conflict will lead to increased inflationary pressures.
Although experts predict that inflation will not reach the peak of 11.1% recorded in October 2022, the current situation complicates forecasting. The Bank of England’s primary mechanism for controlling inflation is interest rate adjustments, and while there were discussions of potential rate cuts earlier this year, many analysts now foresee an increase rather than a decrease in rates. This shift could make borrowing more expensive, while simultaneously offering slightly better returns for savers.
Global Economic Repercussions: Travel and Leisure Costs
Beyond personal finance, the broader implications of the Iran conflict could significantly affect travel costs and consumer behaviour. As jet fuel prices escalate, airlines may be compelled to raise fares or reduce flight availability, narrowing holiday options for consumers this spring and summer. Despite airlines’ strategic purchasing practices, prolonged high fuel costs are likely to be passed on to passengers.
Why it Matters
The unfolding conflict in Iran has immediate and far-reaching consequences for UK consumers. Rising fuel and energy costs, alongside escalating mortgage rates, pose significant challenges to household budgets already strained by the cost-of-living crisis. As the situation develops, understanding these financial implications is crucial for consumers and policymakers alike, highlighting the interconnectedness of global events and local economies. The choices made today will shape the financial landscape for millions in the UK, necessitating a vigilant approach to personal and public finance as uncertainty looms.
