A leading thinktank has warned that the conflict in the Middle East could trigger an energy price shock that reverses the expected £300 rise in living standards for typical working-age households this year. The Resolution Foundation said rising oil and gas prices, driven by disruptions to supplies from Iran, could add a percentage point to UK inflation and increase annual energy bills by £500.
The UK's reliance on gas from the Middle East makes it especially vulnerable to a blockade of the Strait of Hormuz, through which about 20% of the world's liquid natural gas is transported. While the impact may not be as severe as the Russian invasion of Ukraine, the foundation cautioned that all gains could be wiped out if the recent jump in energy prices persists.
According to the thinktank's analysis, living standards for typical working-age households are on track to grow by £300 (0.9%) over the next year. Lower-income households are set for a larger rise of £800 (3.9%), mainly due to the lifting of the two-child benefit cap and an above-inflation increase in universal credit. However, a fresh energy price shock risks puncturing this good news.
James Smith, research director at the Resolution Foundation, called on the government to develop a social tariff to protect low-income households from any energy shock, arguing that across-the-board support, as seen under Liz Truss, was very costly. The Institute for Fiscal Studies echoed this, noting that such support contributed to rising debt levels.
The IFS also highlighted the trade-offs from accelerating the government's defence spending pledge to 3% of GDP by 2030, which would cost £14bn a year and wipe out planned spending increases in other areas unless taxes are raised. Meanwhile, the Joseph Rowntree Foundation argued that the situation could be worse, with average annual household disposable incomes projected to grow by only £40 over the current parliament after adjusting for housing costs.
