Middle East Conflict's Financial Impact on UK Households Explained
The Press Association examines how the ongoing war in the Middle East is unleashing turmoil across global financial markets, with significant repercussions for household finances throughout the United Kingdom. As wholesale oil prices surge to levels unseen for years, concerns mount about knock-on effects to economies worldwide and the cost of living for British families.
Gas and Oil Price Surges Amid Supply Disruptions
A major consequence of the escalating conflict is its impact on global oil and gas supplies. Prices have climbed sharply amid fears that fighting is disrupting supply chains and limiting transportation capabilities. Reports indicate Iran has effectively blocked commercial ships from passing through the Strait of Hormuz, bringing traffic through this crucial waterway to a near-standstill.
The Strait of Hormuz serves as a vital shipping route for tankers carrying approximately one-fifth of the world's oil supplies and seaborne gas. Consequently, the price of Brent crude—a global benchmark for North Sea oil—has soared past $100 per barrel, reaching levels not witnessed since summer 2022. Natural gas prices have also skyrocketed after QatarEnergy, the state-backed energy company, halted liquefied natural gas production due to attacks on its facilities.
Rising Energy Bills for UK Households
While the UK imports oil and liquefied natural gas from various global sources, not solely the Middle East, disruptions to supplies passing through the Strait of Hormuz could significantly increase demand for alternatives. This scenario mirrors what occurred following Russia's invasion of Ukraine in 2022, potentially leading to substantial rises in gas and electricity prices.
Wholesale gas prices directly influence electricity costs and home heating expenses. Analysts at Cornwall Insight forecast household energy bills could rise by 10% from July due to sharp increases in wholesale gas prices. This would elevate Ofgem's price cap for July to September to £1,801 annually for a typical dual-fuel household—an increase of £160 or 10% compared to April's cap.
The final price cap figure depends on average wholesale prices over a three-month period, meaning prolonged elevation and volatility in gas prices would exacerbate the situation. However, National Gas, which operates Britain's gas network, has expressed no current concerns about supply security. Approximately three-quarters of Britain's gas originates from the UK continental shelf and Norway, with around 18% coming from liquefied natural gas, predominantly produced in the United States.
Petrol and Diesel Prices Climbing at the Pump
Crude oil costs significantly affect wholesale fuel prices, driving sharp increases at petrol pumps across the UK. The RAC reported the average price of a litre of petrol at UK forecourts reached 137.5p on Sunday, rising nearly 5p since February 28 when the Middle East conflict began. Average diesel prices increased almost 9p over the same period to 151p per litre.
Analysis by the Energy and Climate Intelligence Unit indicates that oil trading at $100 per barrel could push petrol prices to approximately 150p per litre, while $120 per barrel might result in prices around 170p per litre. RAC head of policy Simon Williams noted oil prices would need to rise significantly and remain elevated for an extended period to create dramatic effects. Other experts suggest motorists may experience gradual price increases for both petrol and diesel.
Potential Impact on Shop Prices and Inflation
Rising oil and shipping costs, alongside disruptions to supply routes and raw materials, could filter through to shop prices in coming months. Analysts highlight specific categories to monitor, including fragrance—particularly oud and other luxury scent bases—and foods produced in the Middle East like dates, olive oil, nuts, and spices such as saffron.
While the Middle East largely imports rather than exports everyday food products, minimizing direct impacts on global food supplies, the region is a major producer of fertilisers like ammonia and sulphur used in farming. Any disruption here could drive up costs for farmers worldwide, potentially affecting products like bread, cereals, pasta, potatoes, and animal feed.
Furthermore, UK brands relying on global supply routes passing through or near the region could face challenges if shipping costs increase or delivery times lengthen, should the conflict persist and spread.
Inflation and Interest Rate Implications
Experts warn that sustained elevation in oil and gas prices could push up inflation in the UK. The British Chambers of Commerce projects that higher oil and gas prices linked to the war might increase Consumer Prices Index inflation to 2.7% by the end of 2026, compared to a previous forecast of 2.1%.
This could discourage the Bank of England from cutting UK interest rates in the near term as it monitors the Middle East situation. The National Institute of Economic and Social Research predicts a prolonged energy price shock could push rates above 4% by year-end, up from the current 3.75%.
Mortgage Rate Increases Amid Global Uncertainty
Several major mortgage lenders have hiked their rates recently following rises in swap rates—financial instruments used by lenders to price mortgages—as global events unfold. HSBC UK, NatWest, Nationwide Building Society, and Coventry Building Society are among institutions adjusting rates amid changing market conditions.
Financial information website Moneyfacts reported multiple lenders adjusting rates on Monday, with average rates on fixed mortgages jumping over the weekend. The average two-year fixed homeowner mortgage rate increased to 4.87% on Monday morning from 4.84% on Friday, while the average five-year fixed rate rose to 4.98% from 4.96%.
