UK households are set to suffer a £2,400 income hit by 2027 as a result of inflation and weak wage growth triggered by the Iran war, according to analysis from the Centre for Economics and Business Research (CEBR). The consultancy reported on Monday that the average household will see £1,100 knocked off their real income this year and £1,300 in 2027.
£70.4bn wiped from household incomes
The cost of the Middle East war to the economy will see £70.4 billion wiped from UK households' real disposable incomes, the CEBR said. Liam Daly, Senior Economist at the CEBR, stated: "The war in Iran is being paid for in diminishing UK spending power."
He added: "Higher inflation and weaker wage growth since February's US and Israeli airstrikes on the Iranian regime are eroding the real value of household incomes. We estimate that for the average UK household, real incomes will be £1,100 lower in 2026 and £1,300 lower in 2027 than they would otherwise have been, bringing the total cost per household to £2,400."
Energy shock and interest rates
Before the war began in February, a number of interest rate cuts had been predicted for this year as inflationary pressures appeared to be fading. However, the energy supply shock means higher gas and oil prices would hit bills, so each pound Brits earn will buy less.
The CEBR anticipates that the Bank of England will keep rates on hold for the rest of this year, which would mean borrowing costs remain high. Firms have also taken a "defensive stance" on investment and hiring since the war, as vacancies slipped to their lowest level for over a decade in the second quarter of 2026.
Impact on spending power
Mr Daly said "eroding" real incomes will drain the spending power needed to drive economic growth. He added: "A conflict fought thousands of miles away continues to bear on UK households, with real income erosion felt in the weekly shop, at the pump and on the energy bill. Until energy markets calm, the squeeze will persist."
The analysis came after energy regulator Ofgem raised its price cap by 4% to a three-year high. On Wednesday, Ofgem announced that the price cap will rise by £60 per year – or £5 per month – to £1,723 for the average household using both electricity and gas, reflecting higher wholesale gas prices as a result of the conflict in the Middle East.
Meanwhile, tensions between the US and Iran escalated at the weekend. Oil prices surged about 3% after US forces struck Iranian rocket launchers in the Strait of Hormuz, marking the first military action in a month. Brent crude was up 2.9% at $90.61 (£66.90) per barrel early Monday, while US benchmark crude oil jumped 2.7% to $85.66 (£63.25) per barrel.
