The Resolution Foundation has issued a stark warning that escalating conflict in the Middle East could trigger an energy price shock, potentially reversing anticipated growth in UK living standards. According to their analysis, a rise in oil and gas prices might add a full percentage point to inflation and increase annual energy bills by £500 for typical households.
Impact on Household Finances
The thinktank's calculations, based on the spring forecast, indicate that typical working-age households are on track to see a £300 increase in living standards over the next year. Lower-income households are expected to benefit even more, with a projected rise of £800, or 3.9%, largely due to the lifting of the two-child benefit cap and above-inflation increases in universal credit. This would mark the second strongest year for living standards among poorer households in two decades.
Vulnerability to Energy Disruptions
The UK's reliance on gas from the Middle East makes it particularly susceptible to supply disruptions, such as a blockade of the Strait of Hormuz, through which approximately 20% of the world's liquid natural gas is transported. Iran has already largely halted oil and gas exports through this critical waterway, exacerbating concerns.
Ruth Curtice, chief executive of the Resolution Foundation, emphasized the uncertainty: "The immediate economic outlook for Britain is highly uncertain, with yesterday's forecasts already looking out of date, while the living standards picture for the rest of the parliament is very lopsided." She added that while this year could be decent for living standards, with wages and benefits rising above inflation, a fresh energy price shock risks undermining these gains.
Broader Economic Concerns
While the potential impact might not match the scale of the energy crisis following Russia's invasion of Ukraine, which drove up food, oil, and gas prices, the foundation warns that persistent high energy costs could erase all projected improvements in living standards. The Joseph Rowntree Foundation has raised even graver concerns, noting that government predictions of average living standards growth ignore housing cost pressures.
Their modelling suggests that after adjusting for inflation, average annual household disposable incomes are projected to grow by only £40 from April 2024 to April 2029. This analysis uses forecasts from the Office for Budget Responsibility and the Institute for Public Policy Research's tax benefit model, which relies on the Office for National Statistics' family resources survey for a more accurate assessment, especially for lower-income groups.
The situation underscores the fragile balance in the UK economy, where geopolitical tensions in the Middle East could swiftly translate into higher costs for consumers, threatening to wipe out hard-won gains in household finances.
