UK Economic Impact of US-Israeli Conflict with Iran

From petrol prices to mortgage rates, the US-Israeli war with Iran has already had an impact on people's finances in the UK. How deep and sustained that turns out to be depends on the duration of the conflict and how quickly supply lines and economies can recover. Here are some of the areas to watch out for. Drivers may have already noticed that prices at the pump are on the rise. On Friday, average petrol prices hit an 18-month high of 140.6p a litre, up nearly 8p since the start of the conflict, while diesel had increased by nearly 17p to 159.2p, the RAC motoring organisation said. The increase triggered a row between petrol retailers and the government ahead of a meeting of the two sides last week. Retailers accused the government of using "inflammatory language" by suggesting firms were profiteering from the oil price surge. According to analysts, every $10 increase in oil pushes up pump prices by roughly 7p a litre. Crude prices have risen sharply since the start of the war, although they are volatile as they react to the status of the conflict and commentary from the White House. However, average petrol prices of 150p per litre are not out of the question if oil prices remain elevated for some time. While motoring organisations say that there are plenty of supplies, they are encouraging people to reduce non-essential journeys. They also suggest people amend their driving style, by not accelerating or braking too hard to conserve fuel. Not everyone has a car or may not use one for a daily commute. However, when petrol rises, it can carry through to higher prices for goods and services. For example, if transport costs for supermarkets increase that could then be reflected in the cost of food. Before the war began, there had been a hope and expectation of a steady fall in the interest rates charged on new, fixed mortgages, as well as lower variable rates. Now, the opposite is happening. Some of the UK's biggest lenders have raised rates, owing to their own funding costs rising and an expectation that the base borrowing rate will not fall as previously anticipated. Average mortgage rates for a two-year fixed deal rose to 5.10% on Friday, up from 4.84% on Friday, 6 March. This is the highest level since July, according to financial information service Moneyfacts. Five-year mortgages went up from 4.96% to 5.19% in the same period and are now at their most expensive since April. At times of economic uncertainty, lenders pull mortgage products off the shelves, reducing choice. More than 500 residential mortgage products have been withdrawn from the market, according to Moneyfacts, although that still leaves 7,147 deals to choose from. "When lenders take the step of pulling deals rather than simply tweaking pricing, it often indicates that funding costs have moved too quickly for incremental changes to keep pace," said Adam French, head of consumer finance at Moneyfacts. There is some protection in place for household gas and electricity bills, thanks to the price cap in England, Wales and Scotland set by energy regulator Ofgem. However, it is time limited and does not cover everyone. The maximum price for each unit of energy, for those on variable deals governed by the cap, is set until July. In fact, prices are going down in April. However, what happens now and until late May on the wholesale energy market will determine these household bills from the summer. A sustained period of high wholesale costs could mean a sharp increase in energy prices for millions of people. The last time there was a particular spike, following Covid and Russia's invasion of Ukraine, the government had to step in to help with the Energy Price Guarantee. Energy Secretary Ed Miliband has told the BBC "if it's necessary to intervene, we will" on energy bills. However, he added, any intervention would depend on the scale of the impact from the conflict. Those looking to fix their energy unit price instead are facing a similar situation as people searching for a mortgage. Some energy tariff providers have pulled deals, or have now set them at a higher price. Geopolitical uncertainty also means there are likely to be fewer deals with a longer duration. The most immediate impact of rising prices is felt by those who use heating oil, often stored in a tank outside their property. There is no cap that limits the cost. Campaigners say prices have more than doubled since the conflict began, and orders have been limited as panic buying adds pressure on the sector. "We may be heading into spring, but anyone running low on oil right now doesn't have the luxury of waiting for prices to fall," said Emma Simpson, chief executive of Rural Action Derbyshire. Heating oil is used widely in rural areas and in Northern Ireland, where there have been calls to support those struggling to pay. Chancellor Rachel Reeves has said the government is to offer a package of support to households struggling with higher heating oil costs, with details expected to be announced on Monday. Competition authorities are also checking whether customers are being treated fairly. "Generally, we would expect that customers who have placed orders for heating oil should receive it at the agreed price. Suppliers should be clear what they are charging and terms must be fair," said Emma Cochrane, at the Competition and Markets Authority. Just at the start of March, UK inflation - which charts the rising cost of living - was forecast to be at or around the Bank of England's target level of 2% over the next five years, according to the Office for Budget Responsibility (OBR). The government's official forecaster said the price of a typical basket of goods would be going up at a rate of 2.3% this year and then 2% a year from 2027. But, it did those sums before the airstrikes on Iran began. Analysts believe this is increasingly unlikely. Making an inflation estimate becomes very difficult, given the volatile situation militarily and economically. Yet, analysts do not think inflation will return to the peak of 11.1% seen in the UK in October 2022. That is because the war in Ukraine also caused spikes in the prices of basic foodstuffs, such as wheat and edible oil, owing to the role of Ukraine in producing those items. That is not the case now. The Bank of England is charged with getting inflation to as close as 2% as possible, and its primary tool to do so is interest rates. After the rate-setting committee met in February, the Bank's governor Andrew Bailey said there was scope for further rate cuts this year. That is now much more in doubt. Analysts who had widely expected borrowing costs to be trimmed in March have now ruled out that possibility. But while borrowing money could become more expensive than previously thought, savings could be slightly more lucrative. In times of uncertainty, people have previously hoarded savings. The spending power of that money may reduce, if the cost of living rises, and it may hit general economic growth in the UK. Wider implications for our finances are highly dependent on how the war - and its global impact - plays out. But, the choice of holiday destinations in the spring and summer may be more limited. Flights could get more expensive. Jet fuel has gone up sharply in price. Although airlines have buying strategies that limit some of this impact, the longer aviation fuel remains expensive the harder it is not to pass this on through higher fares.