Hidden Costs of Iran Conflict Hit UK Households from Fuel to Holidays
The ongoing conflict in Iran continues to rage, despite former President Trump's assertion that the war would conclude "very soon." His remarks late on Monday caused a dramatic fluctuation in oil prices, which had surged to nearly $119 per barrel before retreating to around $90. Trump initially claimed the war was "very complete, pretty much," but later cautioned Iran against blocking the Strait of Hormuz, a critical global shipping route for oil and gas supplies. Recent reports indicate Iran persists in launching drones and missiles at Gulf neighbours, exacerbating regional tensions.
Regardless of future developments, the repercussions of soaring oil and energy prices are already being felt by UK households, with expectations of further economic strain. This conflict is feeding through to various aspects of daily life, from motor fuel to summer getaways, intensifying the cost of living crisis.
Motorists Face Steep Fuel Price Increases
Drivers are experiencing a noticeable spike at the forecourt. Although oil prices have fallen from their peak of $119 per barrel, they remain approximately 30% higher than pre-conflict levels. By early this week, the national average for unleaded petrol rose to 137.8p per litre, with diesel at 151.2p. This translates to an extra £2.70 per fill-up for petrol and £4.85 for diesel compared to before the war erupted.
The full impact of recent oil price surges has yet to materialise, as it typically takes 10 to 14 days for increases to reflect at pumps due to retail supply chains. A general rule is that every $2 per barrel rise in oil prices adds a penny to pump prices. Experts warn that petrol could approach 150p per litre, meaning drivers might pay nearly £9.50 extra per fill-up. Diesel might soar towards 180p per litre, resulting in a £100 average fill-up, £20 more than pre-conflict levels.
Chris Beauchamp, Chief Market Analyst UK at IG, advised caution, stating, "Continued easing in oil prices would require an actual ceasefire in the Middle East, and there is no sign of that happening just yet, suggesting a steady crawl higher rather than one big jump is now the likely outcome."
Energy Bills Threaten to Surge Again
Households and businesses face another significant threat from potential energy bill hikes. Currently, most homes are shielded by Ofgem's price cap, which limits supplier charges per unit of energy. The cap is set to decrease from April 1, reducing average annual bills by £117 to £1,641, largely due to Chancellor Rachel Reeves' budget measures removing policy costs.
However, this reduction was planned before the Middle East conflict escalated, causing wholesale costs—the largest component of bills—to soar. The next price cap adjustment in July is likely to increase, with the extent depending on how long high costs persist. Industry experts at Cornwall Insight estimate the cap could jump by £160 annually to around £1,800, based on recent gas price trends, which have risen an additional 10% since early March.
The prolonged conflict could drive bills even higher by July, though a swift resolution might mitigate impacts. This offers little comfort to households on fixed-rate energy deals, which have become scarcer due to wholesale spikes. A more immediate issue affects 1.5 million homes, many in rural areas, reliant on heating oil, where prices have skyrocketed from 67p to 135.96p per litre. Ministers are urgently exploring assistance and have requested the Competition and Markets Authority to investigate potential supplier profiteering.
Mortgage Rates Rise as Bank of England Holds Off on Cuts
The conflict has also influenced mortgage rates, with Trump's actions disrupting expectations of a Bank of England rate cut next week. Instead, discussions now centre on potential rate hikes to curb inflation spikes. While most existing mortgage holders are unaffected for now, those seeking new deals or remortgaging face increased costs.
Recent withdrawals of cheap fixed-rate mortgages have added approximately £20 per month (£240 annually) for a typical £180,000 loan. With swap rates rising sharply, this extra outlay could soon reach £45 per month (£540 annually). Around 1.2 million borrowers have fixed-rate deals ending between now and September, with major lenders like Barclays and Halifax joining others in raising rates.
According to Moneyfacts, the average two-year fixed residential mortgage rate has increased to 4.93%, up from 4.84% last Friday, while the average five-year fixed rate now exceeds 5% at 5.03%. The number of available residential mortgage products has declined from 7,636 to 7,328, reflecting market tightening.
Shop Prices and Holiday Costs Under Pressure
Disruptions in the Strait of Hormuz, a vital shipping lane, directly affect shop prices through higher transport and energy costs and shipment delays. Prolonged conflict could further inflate high street prices, compounding challenges for retailers already grappling with wage increases and other bills. Recent data from the British Retail Consortium shows sales growth slowed to 1.1% year-on-year last month, below the 12-month average of 2.3%, partly due to adverse weather.
Holiday expenses are also at risk, with jet fuel prices surging about 80% since the crisis began. The Middle East supplies roughly 50% of Europe's aviation fuel imports, meaning ticket prices could rise, fueling broader inflation. Fuel constitutes 20% to 40% of airlines' operating costs, though some impact may be mitigated by hedging strategies where airlines lock in prices months in advance.
In summary, the Iran conflict is imposing hidden costs across multiple sectors, from fuel and energy to mortgages and leisure, placing additional strain on UK households amidst an ongoing cost of living squeeze. The economic fallout underscores the interconnectedness of global events and domestic finances, with experts warning of continued pain unless the situation stabilises.
